Finance: Ch 6
Which of the following factors would be most likely to lead to an increase in nominal interest rates?
A new technology like the Internet has just been introduced, and it increases investment opportunities.
Which of the following would be most likely to lead to a higher level of interest rates in the economy?
Corporations step up their expansion plans and thus increase their demand for capital.
Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you measure the yield curve and find a downward slope, you must have done something wrong.
False
If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill.
False
One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant.
False
Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities.
False
Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline.
False
The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy's labor force.
False
The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) weather conditions.
False
Which of the following statements is CORRECT?
If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.
Assume that the current corporate bond yield curve is upward sloping, or normal. Under this condition, we could be sure that
Maturity risk premiums could help to explain the yield curve's upward slope.
If the pure expectations theory holds, which of the following statements is CORRECT?
The maturity risk premium would be zero.
Which of the following statements is CORRECT?
The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?
The yield on a 10-year bond would be less than that on a 1-year bill.
An upward-sloping yield curve is often call a "normal" yield curve, while a downward-sloping yield curve is called "abnormal."
True
If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.
True
If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase.
True
If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.
True
One of the four most fundamental factors that affect the cost of money as discussed in the text is the risk inherent in a given security. The higher the risk, the higher the security's required return, other things held constant.
True
The "yield curve" shows the relationship between bonds' maturities and their yields.
True
