Chapter 2 - Determinant of Interest Rates SB

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When the government's budgeted expenditures exceed its tax revenues, it is said to have a

budget deficit.

A highly liquid asset has which of the following characteristics?

can be sold quickly; low transaction cost; predictable price

The default risk premium tends to ____ when the economy is ____.

decrease, expanding; increase, contracting

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

flight to quality.

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 Fisher effect predicts that the ____ expected inflation is, the ____ will be nominal interest rates.

lower, lower; higher, higher

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

lower, lower; higher, higher

The ____ the level of actual or expected inflation, the ___ the level of interest rates.

lower, lower; higher, higher

A consequence of the unbiased expectations is that if investors believe that short-term interest rates will ____ in future periods; the yield curve will be ____ sloped.

decrease, negativity; increase, positively

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

household wealth; interest rates

When economic conditions in a country ____, the supply of loanable funds will tend to ____ in that country.

improve, increase; decline, decrease

The _____ the interest rate "r," the ____ the present value of the annuity.

lower, higher; higher, lower

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

lump sum payment.

When local government temporarily invest tax revenues in financial markets until the funds are needed, they become a ____ of loanable funds.

supplier

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

Investors are willing to supply more funds at higher interest rates because

their reward is higher.

Nominal interest rates tend to ___ over time.

vary

Foreign investors supply funds to U.S. financial markets when interest rates on U.S. securities are _____ than on comparable securities in their home markets.

higher

The ____ the interest rate "r," the ____ the value of PV.

higher, lower; lower, higher

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

households.

As an investors' utility (enjoyment) of assets obtained with borrowed funds increases, the demand for borrowed funds will ____ and interest rates will ____.

increase; increase

The correct equation for calculating the future value FV of a lump sum PV at "n" periods in the future given interest rate "r" is

FV = PV(1+r)^n

Business 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.

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 demand for loanable funds ____ as interest rates increase.

decreases

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

default

The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the

default risk premium; credit risk premium

The non-financial sectors of U.S. business ____ far more loanable funds than they ____.

demand; supply

According to the unbiased expectations theory, in equilibrium the return to an investor from holding one "n" year maturity security must _____ the return from holding a series of "n" one-year maturity securities.

equal

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.

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

maturity

The difference between the required yield on long and short-term securities of the same characteristics except maturity is called

maturity premium.

When the non-price restrictions on borrowing are reduced, borrowers will demand ____ funds and interest rates will ____.

more; increase

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

nominal

The greater the number of ____, the greater the demand for funds by businesses.

profitable projects

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

riskiness of investments; immediate consumption needs

True or false: The unbiased expectations theory posits that current long-term interest rates are geometric averages of current and expected future short-term interest rates.

True

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

U.S. Treasury securities.

In a growing economy, the demand for funds is ____ and interest rates will tend to ____.

high; increase

The ____ the annuity payment "PMT," the ____ the future value of the annuity.

higher, higher; lower, lower


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