Learnsmart Chapter 2

The________ the interest rate "r", the ______ the value of FV.

lower; lower & higher; higher

An increase in which of the following factors will cause households to increase their supply of loanable funds provided.

interest rates and household wealth

The greater the number of ________, the greater the demand for funds by businesses

profitable projects

The equilibrium interest rate for a security is the interest rate where the ________ and _________ intersect.

supply curve, demand curve

The ______ the level of actual or expected inflation, the _____ the level of interest rates.

higher; higher & lower; lower

The decrease in funds demanded with increasing interest rates will lead to a demand curve that is ______ sloped

negatively

The quoted rates actually observed by investors in financial markets are called ___________ rates

nominal

Investors demand more funds at lower interest rates because

the cost of borrowing funds is lower

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 expectation theory

Foreign investors supply funds to US financial markets when interest rates rates on US securities are ___________ than on comparable securities in their home markets

higher

The ______ the annuity payment "PMT", the _________ the future value of the annuity.

higher; higher & lower; lower

When interest rates are high, businesses prefer to finance investments with

retained earnings.

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 loanable funds theory views the level of interest rates as being determined by

supply and demand for funds

The financial sector of US business is the ___________ provider of loanable funds and the ______________ user of loanable funds.

largest; largest

Short-term securities have a more active secondary market and hence are more ______ than long term securities

liquid

The _____ the interest rates "r", the _____ the value of PV

higher; lower & lower; higher

A series of equal cash flows received at fixed intervals over an entire finite investment period are

annuity payments

When government monetary policy is expansive and the money supply is expanded, interest rates will __________

decrease

The default risk premium tends to ________ when the economy is ___________.

decrease; expanding and increase; contracting

The demand for loanable funds ________ as interest rates increase.

decreases

The non financial sectors of US business __________ far more loanable funds than they ______________

demand; supply

The tendency of foreign investors to invest their funds in risk-free US government securities during times of crisis is referred to as a

flight to quality

The cumulative sum of past US government deficits is called the

national debt

Nominal interest rates are important because they affect the ___________ of most securities traded in the money and capital markets, at home and abroad.

price

Long maturity securities have more _________ than short maturity securities.

price risk

Nominal interest rates tend to _____________ over time.

vary

T/F The unbiased expectations theory posits that current long term interest rates are geometric averages of current and expected future short term interest rates.

True

____________ are regarded as having no default risk.

US government securities

if the rate of interest is set below the equilibrium rate, there will be _________ loanable funds

a deficit of

A security which can be retired by the issuer before its maturity date is referred to as a ________ security.

callable

When the US Treasury issues debt securities to fund federal budget deficits, they are acting as a ______________ of loanable funds

demander

Businesses 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.

The Fisher effect predicts that the _________ expected inflation is, the __________ will be nominal interest rates.

higher, higher & lower, lower

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

The _____________ the default risk of a security, the ___________ the interested rate demanded by the buyer

lower; lower and higher; higher

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