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Date Posted: 08:52:37 10/08/00 Sun
Author: Charles Hodges
Subject: Summer 2000, 15, 16, and 24
In reply to: Scott 's message, "Back to Summer 2000" on 17:40:42 10/07/00 Sat


15. An investor with a six-year investment horizon believes that interest rates are determined only by expectations about future interest rates, (i.e., this investor believes in the expectations theory). This investor should expect to earn the same rate of return over the 6-year time horizon if he or she buys a 6-year bond or a 3-year bond now and another 3-year bond three years from now (ignore transaction costs).
a. True b. False

This type of question will not be on your exam as it deals with the interesest rate theories from chapter 4. However, the answer is true. Expectations theory says long term rates are a geometric average of expected short terms rates. Under the theory, if the expected return of the combo of two three years did not equal the return of the one six year, people would sell the lower yielding and buy the higher yielding until expected returns were equal.


16. An increase in the firm's inventory balance will normally require additional financing unless the increase is
matched by an equally large decrease in some other asset account.
a. True b. False

True, an increase in assets (inventory) is a use of funds. To maintain your cash balance, there must be an offsetting sources of either a an increase in liabilities (financing) or a decrease in some other asset account.

> #24) Does anyone have any answers for this one?
See my answer to the Summer 1999 open book discussion.

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