Chapter 2 - Determinant of Interest Rates SB
When the government's budgeted expenditures exceed its tax revenues, it is said to have a
budget deficit.
A highly liquid asset has which of the following characteristics?
can be sold quickly; low transaction cost; predictable price
The default risk premium tends to ____ when the economy is ____.
decrease, expanding; increase, contracting
The tendency of foreign investors to invest their funds in risk-free U.S. government securities during times of crisis is referred to as a
flight to quality.
The theory that investors must be compensated for the higher price risk and lower liquidity inherent in longer-term securities is called the
liquidity premium theory.
The Fisher effect predicts that the ____ expected inflation is, the ____ will be nominal interest rates.
lower, lower; higher, higher
The ____ the interest rate "r," the ____ the value of FV.
lower, lower; higher, higher
The ____ the level of actual or expected inflation, the ___ the level of interest rates.
lower, lower; higher, higher
A consequence of the unbiased expectations is that if investors believe that short-term interest rates will ____ in future periods; the yield curve will be ____ sloped.
decrease, negativity; increase, positively
An increase in which of the following factors will cause households to increase their supply of loanable funds provided?
household wealth; interest rates
When economic conditions in a country ____, the supply of loanable funds will tend to ____ in that country.
improve, increase; decline, decrease
The _____ the interest rate "r," the ____ the present value of the annuity.
lower, higher; higher, lower
A single payment received at the beginning or end of an investment period is called a
lump sum payment.
When local government temporarily invest tax revenues in financial markets until the funds are needed, they become a ____ of loanable funds.
supplier
The loanable funds theory views the level of interest rates as being determined by
supply and demand for funds.
The equilibrium interest rate for a security is the interest rate where the ____ and ____ intersect.
supply curve; demand curve
Investors are willing to supply more funds at higher interest rates because
their reward is higher.
Nominal interest rates tend to ___ over time.
vary
Foreign investors supply funds to U.S. financial markets when interest rates on U.S. securities are _____ than on comparable securities in their home markets.
higher
The ____ the interest rate "r," the ____ the value of PV.
higher, lower; lower, higher
The largest net supplier of loanable funds in the U.S. is
households.
As an investors' utility (enjoyment) of assets obtained with borrowed funds increases, the demand for borrowed funds will ____ and interest rates will ____.
increase; increase
The correct equation for calculating the future value FV of a lump sum PV at "n" periods in the future given interest rate "r" is
FV = PV(1+r)^n
Business demand funds for which of the following reasons?
To satisfy short-term working capital needs for inventory and receivables; To invest in long-term (fixed) assets like plant and equipment.
A risk-free investment is one in which the return is
certain.
A security which possesses the option to be exchanged for a different type of security at a preset price is called a ____ security.
convertible
The demand for loanable funds ____ as interest rates increase.
decreases
The risk that a security issuer will fail to make interest and principal payment on the security is called ____ risk.
default
The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the
default risk premium; credit risk premium
The non-financial sectors of U.S. business ____ far more loanable funds than they ____.
demand; supply
According to the unbiased expectations theory, in equilibrium the return to an investor from holding one "n" year maturity security must _____ the return from holding a series of "n" one-year maturity securities.
equal
The theory that argues that investors have specific maturity preferences and must be paid a premium to hold securities of a different maturity is the
market segmentation theory.
Both the unbiased expectations theory and the liquidity premium theory ignore investor preference regarding the ____ of the securities they hold.
maturity
The difference between the required yield on long and short-term securities of the same characteristics except maturity is called
maturity premium.
When the non-price restrictions on borrowing are reduced, borrowers will demand ____ funds and interest rates will ____.
more; increase
The quoted rates actually observed by investors in financial markets are called ____ rates.
nominal
The greater the number of ____, the greater the demand for funds by businesses.
profitable projects
An increase in which of the following factors will cause households to decrease their supply of loanable funds provided?
riskiness of investments; immediate consumption needs
True or false: The unbiased expectations theory posits that current long-term interest rates are geometric averages of current and expected future short-term interest rates.
True
The most frequently reported and analyzed yield curve is the curve for
U.S. Treasury securities.
In a growing economy, the demand for funds is ____ and interest rates will tend to ____.
high; increase
The ____ the annuity payment "PMT," the ____ the future value of the annuity.
higher, higher; lower, lower
