Ch. 2

T/F: The equilibrium interest rate is permanent, since it does not change over time.

False

T/F: Market forces react to disequilibrium with a change in the equilibrium interest rate.

True

Select all that apply. The _______ the level of actual or expected inflation, the _______ the level of interest rates. a. higher; higher b. higher; lower c. lower; lower d. lower; higher

a, c

A security which possesses the option to be exchanged for a different type of security at a preset price is called a _______ security. a. convertible b. optionable c. exchangeable d. municipal

a. convertible

The theory that investors must be compensated for the higher price risk and lower liquidity inherent in longer-term securities is called the a. liquidity premium theory. b. theory of market impostors. c. unbiased expectations theory. d. market segmentation theory.

a. liquidity premium theory

Investors are willing to supply more funds at higher interest rates because a. the demand is higher. b. their reward is higher. c. the demand is lower. d. their reward is lower.

b. their reward is higher

A series of equal cash flows received at fixed intervals over an entire finite investment period are a. lump sum payments. b. annuity payments. c. perpetuity payments. d. dividend payments.

b. annuity payments

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. a. curtailing b. increasing c. decreasing d. charging tax on

b. increasing

A single payment received at the beginning or end of an investment period is called a a. annuity payment. b. lump sum payment. c. dividend payment. d. perpetuity payment.

b. lump sum payment

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 a. theory of capital asset prices. b. market segmentation theory. c. unbiased expectations theory. d. liquidity premium theory.

b. market segmentation theory

The prices of securities with longer maturities are ________ sensitive to changes in interest rates when compared to shorter maturity securities. a. partially b. more c. less d. not

b. more

Nominal interest rates are important because they affect the _________ of most securities traded in the money and capital markets at home and abroad. a. volume b. price c. size d. type

b. price

When local governments temporarily invest tax revenues in financial markets until the funds are needed, they become a _________ of loanable funds. a. demander b. supplier c. user d. custodian

b. supplier

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"? a. FV = PV(1+r)^n b. PV = (1+r)FV c. PV = FV/(1+r)^n d. PV = FV/r

c. PV = FV/(1+r)^n

The most frequently reported and analyzed yield curve is the curve for a. AAA-rated corporate bonds. b. municipal bonds. c. U.S. Treasury securities. d. BBB-rated corporate bonds.

c. U.S. Treasury securities

A risk-free investment is one in which the return is a. large. b. variable. c. certain. d. constant.

c. certain

The demand for loanable funds _________ as interest rates increase. a. does not change b. increases c. decreases d. becomes more volatile

c. decreases

A security whose returns are tax-free can pay _______ interest than a taxable security and still be attractive to investors. a. the same b. different c. lower d. higher

c. lower

The difference between the required yield on long and short-term securities of the same characteristics except maturity is called the a. default risk premium. b. inflation premium. c. maturity premium. d. credit risk premium.

c. maturity premium

The decrease in funds demanded with increasing interest rates will lead to a demand curve that is _________ sloped. a. not b. positively c. negatively d. unevenly

c. negatively

Long maturity securities have more _______ than short maturity securities. a. exchange risk b. credit risk c. price risk d. default risk

c. price risk

The greater the number of _________, the greater the demand for funds by businesses. a. full-time employees b. suppliers c. profitable projects d. customers

c. profitable projects

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. a. Fisher Effect theory b. tax policy changes c. unbiased expectations theory d. household debt level

c. unbiased expectations theory

__________ are regarded as having no default risk. a. Mortgage-backed securities b. Interbank loans c. Bankers' acceptances d. U.S. government securities

d. US government securities

The non-financial sectors of U.S. business ________ far more loanable funds than they ________. a. create; consume b. supply; demand c. use; consume d. demand; supply

d. demand; supply

The largest net supplier of loanable funds in the U.S. is a. the government. b. corporations. c. foreign investors. d. households.

d. households

A real risk-free interest rate is what an investor could earn in a world without a. risk. b. opportunity. c. cost. d. inflation.

d. inflation

The increase in funds supplied with increasing interest rates will lead to a supply curve that is _________ sloped. a. negatively b. infinitely c. zero d. positively

d. positively

The loanable funds theory views the level of interest rates as being determined by a. consumer confidence. b. the Federal Reserve Bank. c. the U.S. Treasury. d. supply and demand for funds.

d. supply and demand for funds

Market segmentation theory posits that the ______ and ______ of securities of differing maturities determines the interest rate at each maturity and hence the shape of the yield curve. a. risk; return b. volume; cost c. supply; risk d. supply; demand

d. supply; demand

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

T/F: 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

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

Select all that apply. An increase in which of the following factors will cause households to decrease their supply of loanable funds provided? a. Immediate consumption needs b. Riskiness of investments c. Interest rates d. Household wealth levels

a, b

Select all that apply. An increase in which of the following factors will cause households to increase their supply of loanable funds provided? a. Household wealth b. Interest rates c. Immediate consumption needs d. Riskiness of investments

a, b

Select all that apply. The ______ the annuity payment "PMT", the _______ the present value of the annuity. a. lower; lower b. lower; higher c. higher; higher d. higher; lower

a, c

Select all that apply. The ______ the interest rate "r", the _______ the value of present value. a. lower; higher b. lower; lower c. higher; lower d. higher; higher

a, c

Select all that apply The ______ the annuity payment "PMT", the _______ the future value of the annuity. a. lower; lower b. higher; lower c. lower; higher d. higher; higher

a, d

Select all that apply. The _______ the default risk of a security, the _______ the interest rate demanded by the buyer. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

a, d

Select all that apply. When financial market participants have ______ near-term spending needs, the supply of loanable funds at every interest rate is ________. a. higher; lower b. higher; higher c. lower; lower d. lower; higher

a, d

If the rate of interest is set below the equilibrium rate, there will be _________ loanable funds. a. a deficit of b. no demand for c. just enough d. a surplus of

a. a deficit of

The financial sector of U.S. business is the _________ provider of loanable funds and the _________ user of loanable funds. a. largest; largest b. smallest; smallest c. smallest; largest d. largest; smallest

a. largest; largest

One model that is commonly used to explain interest rates and interest rate movements is called the a. loanable funds theory. b. interest rate parity theory. c. theory of financial relativity. d. borrowed funds hypothesis.

a. loanable funds theory

Both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the ________ of the securities they hold. a. maturity b. return c. price d. number

a. maturity

The quoted rates actually observed by investors in financial markets are called ________ rates. a. nominal b. effective c. real d. inflated

a. nominal

The equilibrium interest rate for a security is the interest rate where the _______ and ________ intersect. a. supply curve; demand curve b. demand curve; y-axis c. demand curve; indifference curve d. supply curve; x-axis

a. supply curve; demand curve

The ______ the interest rate "r", the _______ the future value of the annuity. a. higher; lower b. higher; higher c. lower; lower d. lower; higher

b, c

Select all that apply. A highly liquid asset has which of the following characteristics? a. Low sale price b. Can be sold quickly c. Predictable price d. Low transaction cost

b, c, d

When interest rates are high, businesses prefer to finance investments with a. IPO proceeds. b. additional stock issues. c. retained earnings. d. proceeds from assets sales.

c. retained earnings

As the _______ of a financial security decreases, it become more attractive to investors and investors are willing to supply more funds to invest in it. The supply curve shifts right and the interest rate ________. a. return; increases b. reputation; decreases c. risk; decreases d. rating; increases

c. risk; decreases

The higher the level of actual or expected inflation, the ___________ (higher/lower) will be the prices of good and services in the future.

higher