Download ECON 4331 Spring 2005 Test 1: Bonds and Financial Markets - Prof. Amanda King and more Exams Economics in PDF only on Docsity! ECON 4331 Spring 2005 A. King Test 1 You have 75 minutes to complete this test. Answer each question as completely and concisely as possible. Remember to adhere to the honor code! 1. You have $1000 that you would like to save by buying a bond. You have decided to buy a discount bond (which matures at the end of 2005) since you know you are going to need the $1000 when you graduate at the end of 2005 to help with moving, wardrobe, and housing expenses. You have done a great deal of research and have discovered several bonds worth considering. Your top two choices are a $1000 face value discount bond issued by the US government and a $1000 face value discount bond issued by the British government. The current price for the US bond is $980. The current price for the British bond is $970. The bonds are identical in all other ways (ignore exchange rate fluctuations in your analysis). a. What is the yield to maturity for each bond? In order to get full credit you MUST show your calculations! (4 points) US: YTM= %202. 980 9801000 or British: YTM= %303. 970 9701000 or b. Based on the Theory of Asset Demand, which bond should you purchase? Explain why (5 points). Based on the Theory of Asset Demand, I should buy the British bond because it has the better expected return, ceteris paribus. 2. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Given what you have learned about the functions of financial markets, explain why this might be true. (10 points) This might be true because in the absence of well-developed financial markets borrower-spenders will have a hard time getting matched up with lender-savers. This means that the entrepreneurs in the economy may not be getting the funding they need to start/do business. Without ample investment spending in the economy, it will grow very slowly if it grows at all. 3. a. Categorize the transactions described according to whether they (a) rely on financial markets or intermediaries, (b) occur in the primary or secondary market, and (c) are carried out in the money or capital market.h4p59 (3 points each) i. A bank makes a 30-year mortgage loan to a household. Intermediary, primary market, capital market ii. ABC Corporation opens for business by selling shares of stock to 10 private investors. Financial market, primary market, capital market
