Quiz 5 Fin 320

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In which of the following situations would the reserve bank in a certain country be most likely to lower interest​ rates?

The economy is growing slowly or not at all.

When you borrow​ money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.

True

What expectations are investors likely to have about future interest​ rates?

Interest rates might rise in the future.

Given that the inflation rate in 2006 was about​ 3.24%, while a short term municipal bond offered a rate of​ 2.9%, which of the following statement is​ correct?

Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.

When the costs of an investment come before that​ investment's benefits, what will be the the effect of a rise in interest rates on the attractiveness of that investment to potential​ investors?

It will make it less​ attractive, since it will decrease the​ investment's net present value​ (NPV).

In an effort to maintain price​ stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on shortminus and longminus term interest rates in​ Europe?

Longminus term interest rates will tend to be higher than shortminus term interest rates.

Which of the following statements is​ FALSE?

The annual percentage rate indicates the amount of interest including the effect of compounding.

Which of the following reasons for considering longminus term loans inherently more risky than shortminus term loans most​ accurate?

The loan values are very sensitive to changes in market interest rates.

​Historically, why have high inflation rates tended to be associated with high nominal interest​ rates?

The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

What is the shape of the yield curve given in the following term​ structure? What expectations are investors likely to have about future interest​ rates? Term 1 year 2 years 3 years 5 years 7 years 10 years 20 years Rate​ (%) 2.02 2.41 2.77 3.33 3.77 4.13 4.91 What is the shape of the yield curve given the term​ structure? ​(Select the best choice​ below.)

The yield curve is a normal yield curve​ (increasing).

Market forces determine interest rates based ultimately on the willingness of​ individuals, banks, and firms to​ borrow, save, and lend.

True

What is the effective annual rate​ (EAR)?

the interest rate that would earn the same interest with annual compounding

Which of the following statements is​ FALSE?

​Fundamentally, interest rates are determined by the Federal Reserve.


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