Le Moyne College
FIN 365: Financial Institutions & Markets - Sample Test
Dr. C. Kim

A. Quesitons

PART I. Multiple choice questions.(3 points each)

1. A 5-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called:

2. Which of the following are likely to cause a decrease in the U.S. interest rate, other things being equal?

3. The prices of bonds with ________are most sensitive to interest rate movements.

4. According to the liquidity premium theory, the expected yield on a 2-year security will ____ the expected yield form 1-year securities.

5.The voting members of the Federal Open Market Committee include:

6. According to the monetarists, when the Fed significantly decreases money supply, the inflation tends to______ in about 2 years, which in turn places ______ pressure on interest rates.

PART II. Short-answer questions(4 pts each)

1. Briefly describe the economic trade-off faced by the Fed in achieving its economic goals (max. 2/3 page)

2. One of 3 tools used by the Fed to conduct monetary policy is Open Market Operation. Briefly explain the operation.

(max. 1/2 p.)

3. Briefly explain the market segmentation theory of the term structure of interest rates. (max. 1/2 p.)

PART III. Problems.(5 pts each)

1. As of today, the 3-year interest rate is 14%, while the 1st-year rate is 10%, and the 2nd year rate is 11%. Estimate the

1-year forward(the 3rd year) rate.

2. Based on the Fisher Effect, what will be the real rate of interest, if the nominal rate is 12%, and expected inflation rate

is 3%? Compute it.