13/10/2021, 10:20 Graded Quiz 3

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[MACR-2003] [BA Economics 2020] /
Week 11: Expectations, Output and Policy /
Graded Quiz 3

Question 1

Not yet If you calculate the present discounted value of stock prices using nominal dividends, but real interest
answered rates assuming constant expectations, you get 
Marked out of
0.50

Select one:
a. nominal stock prices

b. neither nominal nor real stock prices

c. real stock prices

Clear my choice

Question 2

Answer saved The yield curve normally slopes upwards.

Marked out of
0.50

Select one or more:

a. True, given other things are identical among the bonds.

b. False, because it could slope down. This is called an inverted yield curve.

c. True

d. False

Question 3

Answer saved Even in a bubble, the value of the asset is the expected present value of its future returns.

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0.50

Select one:
a. False

b. True

Clear my choice

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13/10/2021, 10:20 Graded Quiz 3

Question 4

Not yet Suppose that an investor buys a three-year bond with the expectations of constant interest rates during
answered the bond’s lifetime. According to her calculations, the bond price is now $100. The real interest rate
Marked out of expected by the investor is 5%. What happens to the bond price if, following an economic shock, the
0.50
investor’s expectations about the state of the economy worsen, and she now expects a decline in the
interest rate next year, for instance to 3%?

Select one:
a. Rises from 90 to 86

b. Falls from 85 to 80

c. Rises from 86 to 89

d. Falls from 100 to 89

Clear my choice

Question 5

Not yet Suppose that an investor buys a three-year bond with the expectations of constant interest rates during
answered the bond’s lifetime. According to her calculations, the bond price is now $100. The real interest rate
Marked out of expected by the investor is 5%. Now suddenly the real interest rate jumps to 8% in the second year.
0.50
What should the real interest rate be in the third year so that it completely offsets this increase in the
second year to an expected real interest rate of 5%.

Select one:
a. 3

b. 2

c. 1

d. 5

Clear my choice

Question 6

Answer saved If the risk premium is larger, all else equal, what happens to the price of the stock today?

Marked out of
0.50

Select one:
a. Risk premium does not affect the price

b. Rises

c. Nothing really happens as opposing effects cancel out

d. Falls

Clear my choice

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13/10/2021, 10:20 Graded Quiz 3

Question 7

Not yet
Suppose that a one-year bond with a face value of $1,000 and a two-year bond with a face value of
answered
$1,060 are exchanged in the market. Suppose that the two bonds have the exact same risk
Marked out of
characteristics. Suppose further that the current interest rate is 5%, and that market participants expect
0.50
the interest rate to be 6% next year. If investors want to hold the two bonds for one year only, what is
the present value of the two bonds?

Select one:
a. 1000

b. 1060

c. 943

d. 900

e. 952

Question 8

Not yet Suppose that a one-year bond with a face value of $1,000 and a two-year bond with a face value of
answered $1,060 are exchanged in the market. Suppose that the two bonds have the exact same risk
Marked out of characteristics. Suppose further that the current interest rate is 5%, and that market participants expect
0.50
the interest rate to be 6% next year. If investors want to hold the two bonds for one year only, would
arbitrage work?

Select one:
a. It would work because the bonds have different value.

b. It wont because the investor is interested in only keeping the bonds for a year

c. It wont because for two years, the bond PDVs are identical

d. It wont cause the investors are indifferent between the two bonds

Question 9

Not yet Suppose that a one-year bond with a face value of $1,000 and a two-year bond with a face value of
answered $1,000 are exchanged in the market. Suppose that the two bonds have the exact same risk
Marked out of characteristics. Suppose further that the current interest rate is 5%, and that investors want to hold the
0.50
two bonds for one year only. What is the expected one year interest rate to open up arbitrage?

Select one or more:

a. less than 6%

b. 6%

c. more than 6%

d. 5%

e. 5.99

f. 6.45%

g. 7.25% 
h. 10%
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13/10/2021, 10:20 Graded Quiz 3

Question 10

Not yet Suppose that an investor has a choice between buying a three-year bond with a face value of $60 and a
answered stock paying a constant dividend of $20 per year, which the investor plans to hold for three years. The
Marked out of real interest rate on the stock and the bond is the same, 5%. In addition, the risk premium on the stock is
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constant at 10%;on the bond, the risk premium is 5%. Which one should the investor chose?

Select one:
a. bonds because it gives an assured return

b. stocks because its PDV is more by a significant dollar value

c. could choose either as there is not a significant difference between them

d. stocks because the investor could sell it anytime in a secondary market

e. bonds because the assured return is on 60$ while stock only pays 20$

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