Chapter 2 (Connect)
The ______ the interest rate "r", the _______ the FUTURE VALUE of the annuity.
- lower, lower - higher, higher
A single payment received at the beginning or end of an investment period is called a
Lump sum payment.
Which of the following is the correct equation for calculating the PRESENT value of a lump sum received "n" periods in the future given interest rate "r"?
PV = FV/(1+r)^n
Which of the following is the correct equation for calculating the PV of a lump sum received "n" periods in the future given interest rate "r"?
PV = FV/(1+r)^n
__________ are regarded as having no default risk.
US Gov't Securities
If the rate of interest is set below the equilibrium rate, there will be _________ loanable funds.
a deficit of
If the rate of interest is set above the equilibrium rate, there will be _________ loanable funds.
a surplus of
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 default risk premium tends to _______ when the economy is _________.
decrease, expanding increase, contracting
The demand for loanable funds _________ as interest rates increase.
decreases
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 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.
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 higher the level of actual or expected inflation, the ________________ will be the prices of good and services in the future.
higher
When financial market participants have ______ near-term spending needs, the supply of loanable funds at every interest rate is ________.
higher, lower lower, higher
The largest net supplier of loanable funds in the U.S. is
households
When government monetary policy is restrictive and the money supply is constricted, interest rates will _______.
increase
In a growing economy, the demand for funds is _______ and interest rates will tend to ________.
increase, rise
The supply of loanable funds _________ with increasing interest rates.
increases
During the recent financial crisis, the federal government attempted to rescue the U.S. economy from a deep economic recession by _________ the supply of funds to business and consumers.
increasing
A real risk-free interest rate is what an investor could earn in a world without
inflation
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 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
The difference between the required yield on long and short-term securities of the same characteristics except maturity is called the
maturity premium
The prices of securities with longer maturities are ________ sensitive to changes in interest rates when compared to shorter maturity securities.
more
When the non-price restrictions on borrowing are reduced, borrowers will demand ______ funds and interest rates will _______.
more; increase
Governments demand funds to finance temporary imbalances between __________ and ___________.
operating revenues; expenditures
Over time, the most common shape of the yield curve is _______ indicating that on average, the maturity premium is ________.
positively sloped; positive
Nominal interest rates are important because they affect the _________ of most securities traded in the money and capital markets at home and abroad.
price
Investors may demand a liquidity risk premium for longer-maturity securities to compensate them for the greater _________ they are exposed to compared to shorter-maturity securities.
price risk
Long maturity securities have more _______ than short maturity securities.
price risk
The greater the number of _________, the greater the demand for funds by businesses.
profitable projects
When local governments temporarily invest tax revenues in financial markets until the funds are needed, they become a _________ of loanable funds.
supplier
The loanable funds theory categorizes all market participants (consumers, businesses, governments, and foreign participants) as net _______ or ______ of funds.
suppliers; demanders
The relationship among the real risk-free rate, the expected inflation, and the nominal interest rate is called: i = RFR + EIP
the Fisher effect.
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 term structure of interest rates represents the market's current expectations of future short-term interest rates, so the _____ can be used to forecast forward rates.
unbiased expectations theory
The theory that asserts that the yield curve at a given point in time reflects the market's current expectations of future short-term interest rates is the
unbiased expectations theory
Nominal interest rates tend to _________ over time.
vary
The Fisher effect predicts that the ________ expected inflation is, the _________ will be nominal interest rates.
lower, lower higher, higher
The _______ the default risk of a security, the _______ the interest rate demanded by the buyer.
lower, lower higher, higher
Both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the ________ of the securities they hold.
maturity
The loanable funds theory views the level of interest rates as being determined by
supply and demand for funds
True or false: The unbiased expectations theory acknowledges that an investor with an "n" year investment horizon has a choice between purchasing one "n" year maturity security, or a series of "n" one-year maturity securities.
true
When interest rates are high, businesses prefer to finance investments with
retained earnings
True or false: Market forces react to disequilibrium with a change in the equilibrium interest rate.
true
As the _______ of financial market participants increases, the absolute dollar value available for investments purposes increases, and the supply curve shifts to the ________.
wealth; right
A series of equal cash flows received at fixed intervals over an entire finite investment period are
annuity payments
The difference between the nominal quoted on A SECURITY and the rate quoted on a TREASURY security with similar characteristics is called the
- credit risk premium - default risk premium
The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the
- credit risk premium - default risk premium
When economic conditions in a country ________, the supply of loanable funds will tend to ________ in that country.
- decline, decrease - improve, increase
An increase in which of the following factors will cause households to INCREASE their supply of loanable funds provided?
- household wealth - interest rate
A consequence of the unbiased expectations theory is that if investors believe that short-term interest rates will _______ in future periods, the yield curve will be ________ sloped.
- increase, positively - decrease, negatively
A highly liquid asset has which of the following characteristics?
- low transaction cost - can be sold quickly - predictable price
The ______ the interest rate "r", the ______ the PRESENT VALUE of the annuity.
- lower, higher - higher , lower
The ______ the annuity payment "PMT", the _______ the FUTURE VALUE of the annuity.
- lower, lower - higher, higher
The ______ the annuity payment "PMT", the _______ the PRESENT VALUE of the annuity.
- lower, lower - higher, higher
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
Businesses demand funds for which of the following reasons?
- to invest in LTA (like PPE) - to satisfy short term working capital
A _______________ rate is an expected or "implied" rate on a short-term security that is to be originated at some point in the future.
forward
The financial sector of U.S. business is the _________ provider of loanable funds and the _________ user of loanable funds.
largest; largest
Due to the value of the conversion option, convertible securities generally pay ________ rate of interest than similar non-convertible securities.
lower
The _______ the level of actual or expected inflation, the _______ the level of interest rates.
lower, lower higher, higher
The non-financial sectors of U.S. business ________ far more loanable funds than they ________.
demand; supply
True or false: The equilibrium interest rate is permanent, since it does not change over time.
false
The increase in funds supplied with increasing interest rates will lead to a supply curve that is _________ sloped.
positively
Which of the following is the correct equation for calculating the future value of a lump sum at "n" periods in the FUTURE given interest rate "r"?
FV = PV(1+r)^n
When the government's budgeted expenditures exceed its tax revenues, it is said to have a
budget deficit
Investors demand more funds at lower interest rates because the
cost of borrowing funds is lower.