FIN 3100 Chapter 5 Review Questions Interest Rates. Your Welcome :)
Liquidity Premium
Is the portion of a nominal interest rate that represents compensation of the lack of the ability to sell the bond at its fair value in a timely manner.
Which of the following statements is TRUE if you increase your monthly payment above the required loan payment?
You can significantly reduce the number of payments needed to pay off the loan.
Default Risk Premium
is the portion of a bond yield that compensates investors for the possibility that the bond's interest or principle might not be paid
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and of principal payments as expected?
Default risk Premium
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:
Downward Sloping
Which one of the following premiums is paid on a corporate bond due to its tax status?
Tax-ability Premium
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?
Real Rate
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?
Liquidity Premium
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the what of those Securities.
Maturity
Represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full.
Maturity Premium
The term structure of interest rates represents the relationship between which of the following?
Nominal rates on Treasury Securities and Time to Maturity
You invest 15,000 today, compounded monthly, with an annual interest rate of 8.25%. What amount of interest will you earn in one year?
1,285.38
If your nominal rate of return is 8.40% and your real rate of return is 3.20% what is the inflation rate?
5.04
You have a 30 year fixed rate mortgage at an annual rate of 6.5 percent. Knowing that your mortgage payments are monthly, compute the effective annual rate (EAR) that you're being charged on your mortgage.
6.70%
Atlanta Markets has a semi-annual bond outstanding with a 9 percent annual coupnon rate and a 9.57% yeield to maturity. If the current rate of inflation is 2.3 %, what is the real rate of return on this bond?
7.11%
APR
Annual Percentage Rate
Which of the below is NOT a major component of the term structure of interest rates?
Default Risk Premium
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?
Default risk premium
EAR
Effective Annual Rate
A real rate of return is defined as a rate that has been adjusted for which one of the following?
Inflation
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?
Interest rate risk Premium
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?
Interest rate risk premium
Interest rate risk Premium
Is the compensation investors require for their assumption of the risk related to changes in interest.
Inflation Premium
Is the compensation investors require to offset expected future prices.
Tax ability Premium
Is the compensation that investors demand for a corporate bond over that of a comparable municipal bond.
Which of the statements below is FALSE? a) reducing principle at a faster pace reduces the overall interest paid on the loan. b) The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher. c) Reducing principle at a faster pace increases the overall interest paid on a loan. d) Monthly interest on a loan is equal to the beginning balance times the periodic interest rate.
Reducing principle at a faster pace increases the overall interest paid on a loan.
Generally speaking, bonds issued in the U.S. pay interest on a what basis.
Semi-Annual
Which of the statements below is FALSE? a)If you invest money for a short period and buy a six-month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period. b) The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. c)The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full. d) The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
An upward sloping term structure of interest rates indicates:
The nominal rate is increasing even though the real rate is constant as the time to maturity increases.
Nominal interest rates are roughly speaking the sum of two major components. These components are
The real interest rate and expected inflation
The Fisher Effect tells us that the true nominal rate is actually made up of three components. These three components are
The real rate, the inflation rate, and the product of the real rate and inflation
Which one of the following bonds is most apt to have the smallest or no liquidity premium?
Treasury Bill