FIN321 Chapter 2 SmartBook
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 frequent reported and analyzed yield curve is the curve for ______.
U.S. Treasury securities
______ are regarded as having no default risk.
U.S. government securities
If the rate of interest is set above the equilibrium rate, there will be ______ loanable funds.
a surplus of
A series of equal cash flows received at fixed intervals over an entire finite investment period are ______.
annuity payments
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
Investors demand more funds at lower interest rates because the ______.
cost of borrowing funds is lower
The demand for loanable funds ______ as interest rates increase.
decreases
True or false: The equilibrium interest rate is permanent, since it does not change over time.
false the equilibrium interest rate is only temporary and changes over time due to several factors
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
The ______ the annuity payment "PMT", the ______ the present value of the annuity.
higher; higher lower; lower
The ______ the level of actual or expected inflation, the ______ the level of interest rates.
higher; higher lower; lower
The ______ the interest rate "r", the ______ the present value of the annuity.
higher; lower lower; higher
The largest net supplier of loanable funds in the U.S. is ______.
households
An increase in which of the following factors will cause households to increase their supply of loanable funds provided?
interest rates household wealth
Short-term securities have a more active secondary market and hence are more ______ than long-term securities.
liquid
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 ______ the interest rate "r", the ______ the value of present value.
lower; higher higher; lower
A single payment received at the beginning or end of an investment period is called a ______.
lump sum payment
A highly liquid asset has which of the following characteristics?
predictable price low transaction cost can be sold quickly
Nominal interest rates are important because they affect the ______ of most securities traded in the money and capital markets at home and abroad.
price
As the ______ of a financial security decreases, it becomes 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 ______.
risk; decreases
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 equilibrium interest rate for a security is the interest rate where the ______ and ______ intersect.
supply curve; demand curve
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
True or false: Market forces react to disequilibrium with a change in the equilibrium interest rate.
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
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 (it also increases)
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
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
For securities that are not highly liquid, investors demand a(n) ______ to the interest rate as compensation.
liquidity risk premium
The ______ the default risk of a security, the ______ the interest rate demanded by the buyer.
lower; lower higher; higher
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
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
