FIN 3100 - determinants of interest rates

The ___ the interest rate "r", the ___ the present value of the annuity

Higher; Lower Lower, Higher

the default risk premium tends to ___ when the economy is ____

increase ; contracting decrease; expanding

a consequece of the unbiased expecations theory is that if investors believe that shrot term interest rates will ___ in future periods, the yielf curve will be ___ sloped

increase, positively, decrease, negatively

the financial sector of the US business is the ___ provider of loanable funds and the ___ user of loanable funds

largest ; largest

the difference between the required yield on long and short term s ecurities of the same characteristics expect maturity is called the

maturity risk premium

true or false: the unbiased expecations theory posits that current long term interest rates are geometri averages of current and expected future short term interest rates?

TRUE

due to the value of the conversion option, convertible securities generally pay ___ rate of interest than similar non-convertible securities

a lower

the ___ the interest rate "r' the ___ the value of PV

higher ; lower lower ; higher

as an investors utility of assets obtained with borrowed funds increases, the demand for borrowed funds will ____ and interest rates will ____ .

increase ; increase

for securities that are not highly liquid, investors demand a ___ 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

the ____ the interest rate "r", the ____ the value of FV

lower: lower higher ; higher

the ___ the default risk of a security, the ___ the interest rate demanding by the buyer

lower; lower higher ; higher

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

lump sum payment

nominal interest rates are important because they affect the _____ of most securties traded in the money and capital markets at home and abroad

price

market segmentation theory says that the ___ and the ___ of securities of differing maturities determines the interst rate at each maturity and hence the shape of the yeild curve

supply and demand

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

us treasury securities

the relationship between interst 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

if the rate of interest is set below the equilibrium rate, there will be ___ loan able funds

a deficit of

the increase in funds supplied with increasing interest rates will lead to a supply curve that is ____ slopped

positively

when local governments temporarily invest tax revenues in financial markets until the funds are needed, they becoe a ___ of loanable funds

supplier

the loanable funds theory categorizes all market participants (consumers, business, governments, and foreign participants ) as net ___ or ___ of funds.

suppliers ; demanders

short term securities have more active secondary market and hence are more ____ than long term securities

Liquid

when financial market participants have ___ near term spending needs, the supply of loanable funds at every interest rate is

Lower ; higher higher ; lower

the ___ the level of actual or expected inflation, the ___ the level of interest rates

Lower; lower higher; higher

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

annuity payments

the difference between the nominal rate quoted on a security and the rate quoted on a treasury security with similary characteristics is called the

credit risk premium default risk premium

businesses demand funds for which of the following reasons?

to invest in long term fied assets like plant and equipment to satisfy short term working capital needs for investory and recievables