Chapter 2 pre work

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

The demand for loanable funds _________ as interest rates increase.

decreases

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

A real risk-free interest rate is what an investor could earn in a world without

inflation.

Both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the ________ of the securities they hold.

maturity

Long maturity securities have more _______ than short maturity securities.

price risk

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

Immediate consumption needs Riskiness of investments

Select all that apply An increase in which of the following factors will cause households to increase their supply of loanable funds provided?

Interest rates Household wealth

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

Nominal

True or false: Market forces react to disequilibrium with a change in the equilibrium interest rate.

True

__________ are regarded as having no default risk.

U.S. government securities

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

annuity payments.

The largest net supplier of loanable funds in the U.S. is

households.

The relationship between interest rates and the maturity of securities that differ only in their maturity characteristic is called the term structure of interest rates, or the

yield curve.

True or false: The equilibrium interest rate is permanent, since it does not change over time.

False

The risk that a security issuer will fail to make interest and principal payment on the security is called _______ risk.

default

Investors in callable securities generally require _______ interest compared to non-callable securities.

higher

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

higher

Select all that apply The ______ the annuity payment "PMT", the _______ the present value of the annuity.

higher; higher lower; lower

Select all that apply The _______ the level of actual or expected inflation, the _______ the level of interest rates.

higher; higher lower; lower

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

liquid

For securities that are not highly liquid, investors demand a(n) ___________ to the interest rate as compensation.

liquidity risk premium

One model that is commonly used to explain interest rates and interest rate movements is called the

loanable funds theory.

Select all that apply The ______ the interest rate "r", the _______ the value of present value.

lower; higher higher; lower

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

lower; higher higher; lower

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

negatively

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.

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.

supply; demand

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

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

If the rate of interest is set above the equilibrium rate, there will be _________ loanable funds.

a surplus of

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

a deficit of

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

price

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

The most frequently reported and analyzed yield curve is the curve for

U.S. Treasury securities.

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

callable

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 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.

A single payment received at the beginning or end of an investment period is called a

lump sum payment.

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