Chapter 5 DSM

Over the past 65 years the highest U.S. inflation rate occurred in:

1981

The Truth in Lending Act of 1968 mandates banks quote loan rates as an __________ which effectively __________ the true cost of the loan if the compounding frequency is more than one time a year.

APR; understates

Which of these loan types has the highest default risk?

Credit card loans

The relationship between nominal interest rates, real interest rates and inflation is known as the:

Fisher effect.

Which of these statements about interest rates and inflation is true?

If there is zero inflation, the nominal interest rate is equal to the real interest rate.

In finance, __________ are often used as a proxy for the risk-free interest rate.

U.S. Treasury bills

Some financial advisors recommend making one extra mortgage payment per year since the extra payment:

all goes toward principal reduction.

As you increase the compounding frequency the future value will:

increase.

As you increase the compounding frequency, holding all else constant, the effective annual rate:

increases

In general, if the loan's collateral is __________ in value the default premium will be __________.

increasing; lower

A(n) __________ yield curve is downward sloping and to the right which means that short-term interest rates are __________ than long-term interest rates.

inverted; higher

The stated rate of interest on a loan is the __________.

nominal interest rate

Titan State Bank offers to pay you 6% interest, compounded quarterly. The 6% interest rate is known as the:

nominal interest rate

The yield curve refers to a curve constructed with:

time to maturity on the x-axis and interest rate on the y-axis.

The __________ is a graphical representation of the term structure of interest rates.

yield curve