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(econ333)[2004](f)midterm~masze^_10252.pdf
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Midterm Exam
Money and Banking
Economics 333
Thursday, October 21 2004

Short Answer (5 points each)
1. Cheung Kong issues a new 5 year US dollar bond which it sells directly to a trader at the Bank of America in exchange for a check. This transaction occurs in the:
a.
Primary Market, Derivative Market, and Over-the-Counter market

b.
Secondary Market, Derivative Market and Cash Market

c.
Auction Market, Primary Market, and Derivative Market

d.
Over-the-Counter Market, Primary Market and Cash Market


D
e. Over-the-Counter Market, Derivative Market and Secondary Market
2. 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.


3. 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 positive appreciation rate of the HK dollar (relative to the Singapore dollar) over the next coming year. The yield on a 2 year HK dollar bond is 8% and the yield on a 2 year Singapore dollar bond is 10%. The appreciation rate is the growth rate of the exchange rate. The market expects
a.
the interest rates on HK dollar bonds to be greater than 5% next year and the appreciation rate of the HK dollar to be positive in the next coming year and negative in the subsequent year.

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

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

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


A

4. We see that in the United States there is a high-tech investment boom coupled with a large government budget deficit. From the Hong Kong dollar loanable funds market perspective, we should observe:
a.
An increase in the supply of loanable funds in HK and an increase in bond yields.

b.
An increase in the supply of loanable funds in HK and a decrease in bond yields.

c.
A decrease in the supply of loanable funds in HK and an increase in bond yields.

d.
A decrease in the supply of loanab