FIN 365: Financial Institutions & Markets

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:

a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.

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

a. a decrease in savings by foreign savers.
b. an increase in inflation.
c. pessimistic projections that cause businesses to reduce expansion plans.
d. a decrease in savings by U.S. households.

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

a. high coupon payments.
b. small coupon payments
c. zero coupon payments.
d. none of the above.

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

a. equal.
b. be less than.
c. be greater than.
d. none of the above.

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

a. the BOGs and the president of the U.S.
b. the BOGs, New York Federal Reserve Bank president, and other presidents.
c. the BOGs and the presidents of 12 Fed banks.
d. the BOGs and the Fed Advisory Council members.

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.

a. increase; upward.
b. increase; downward.
c. decrease; downward
d. decrease; upward.

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.



B. Answers


1.a, 2. c, 3. c, 4. c, 5. b, 6. c.

1. 21.3%, 2. 9%.

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