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(ECON333)EC333PracticeFinal07.pdf
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Final Exam
Money and Banking
Economics 333
Thursday, December 14, 2005

Answer All Questions on this exam sheet. Do not turn in the scratch paper bluebooks.

Short Answer (2 points each)

1.
We see that for a 10-period coupon bond, the current yield is greater than the coupon rate. This implies:


a.
The price is higher than the face value and the yield to maturity is higher than the current yield.


b.
The price is higher than the face value and the yield to maturity is lower than the current yield.


c.
The price is lower than the face value and the yield to maturity is higher than the current yield.


d.
The price is lower than the face value and the yield to maturity is lower than the current yield.





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2.
Assume that uncovered interest parity and the expectations theory of the term structure are true. The yield on 1 year HK dollar bonds is 5% and the yield on 1 year Singapore dollar bonds is 10% indicating that the market expects a depreciation of the Singapore dollar (relative to the HK dollar) over the upcoming year. The yield on a 2 year HK dollar bond is 8% and the yield on a 2 year Singapore dollar bond is 10%.


a.
the interest rates on 1 year HK dollar bonds to be greater than 5% next year and the depreciation rate of the HK dollar to be negative in the upcoming year and positive in the subsequent year.


b.
the interest rate on 1 year HK dollar bonds to be greater than 5% next year and the depreciation rate of the HK dollar to be negative in the next coming year and negative in the subsequent year.


c.
the interest rates on 1 year HK dollar bonds to be less than 5% next year and the depreciation rate of the HK dollar to be negative in the upcoming year and positive in the subsequent year.


d.
the interest rate on 1 year HK dollar bonds to be less than 5% next year and the depreciation rate of the HK dollar to be negative in the next coming year and negative in the subsequent year.





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3.
We see that in the United States there is a high-tech investment boom coupled with a large government budget deficit. Assuming that Hong Kong maintains a credible exchange rate peg with the US dollar, we should observe:


a.
An increase in the supply of bonds in the US dollar market and an increase in bond yields in HK.


b.
An increase in the supply of bonds in the US dollar market and a decrease in bond yields in HK.


c.
A decrease in the supply of bonds in the US dollar market and an increase in bond yields in HK.


d.
A decrease in the supply of bonds in the US dollar market and a decrease in bond yields in HK.






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4.
A bank with no excess reserves faces a sudden large withdrawal of funds by a depositor. To improve the liquidity of its balance sheet, the bank could


a.
Sell second