Chapter 2 (Connect)

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The ______ the interest rate "r", the _______ the FUTURE VALUE of the annuity.

- lower, lower - higher, higher

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

Lump sum payment.

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

Which of the following is the correct equation for calculating the PV of a lump sum received "n" periods in the future given interest rate "r"?

PV = FV/(1+r)^n

__________ are regarded as having no default risk.

US Gov't Securities

If the rate of interest is set below the equilibrium rate, there will be _________ loanable funds.

a deficit of

If the rate of interest is set above the equilibrium rate, there will be _________ loanable funds.

a surplus of

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 default risk premium tends to _______ when the economy is _________.

decrease, expanding increase, contracting

The demand for loanable funds _________ as interest rates increase.

decreases

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 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.

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 higher the level of actual or expected inflation, the ________________ will be the prices of good and services in the future.

higher

When financial market participants have ______ near-term spending needs, the supply of loanable funds at every interest rate is ________.

higher, lower lower, higher

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

households

When government monetary policy is restrictive and the money supply is constricted, interest rates will _______.

increase

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

increase, rise

The supply of loanable funds _________ with increasing interest rates.

increases

During the recent financial crisis, the federal government attempted to rescue the U.S. economy from a deep economic recession by _________ the supply of funds to business and consumers.

increasing

A real risk-free interest rate is what an investor could earn in a world without

inflation

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 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

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

maturity premium

The prices of securities with longer maturities are ________ sensitive to changes in interest rates when compared to shorter maturity securities.

more

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

more; increase

Governments demand funds to finance temporary imbalances between __________ and ___________.

operating revenues; expenditures

Over time, the most common shape of the yield curve is _______ indicating that on average, the maturity premium is ________.

positively sloped; positive

Nominal interest rates are important because they affect the _________ of most securities traded in the money and capital markets at home and abroad.

price

Investors may demand a liquidity risk premium for longer-maturity securities to compensate them for the greater _________ they are exposed to compared to shorter-maturity securities.

price risk

Long maturity securities have more _______ than short maturity securities.

price risk

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

profitable projects

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

supplier

The loanable funds theory categorizes all market participants (consumers, businesses, governments, and foreign participants) as net _______ or ______ of funds.

suppliers; demanders

The relationship among the real risk-free rate, the expected inflation, and the nominal interest rate is called: i = RFR + EIP

the Fisher effect.

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 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

The Fisher effect predicts that the ________ expected inflation is, the _________ will be nominal interest rates.

lower, lower higher, higher

The _______ the default risk of a security, the _______ the interest rate demanded by the buyer.

lower, lower higher, higher

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

maturity

The loanable funds theory views the level of interest rates as being determined by

supply and demand for funds

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

When interest rates are high, businesses prefer to finance investments with

retained earnings

True or false: Market forces react to disequilibrium with a change in the equilibrium interest rate.

true

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

A series of equal cash flows received at fixed intervals over an entire finite investment period are

annuity payments

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

- credit risk premium - default risk premium

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

- credit risk premium - default risk premium

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

- decline, decrease - improve, increase

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

- household wealth - interest rate

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

- increase, positively - decrease, negatively

A highly liquid asset has which of the following characteristics?

- low transaction cost - can be sold quickly - predictable price

The ______ the interest rate "r", the ______ the PRESENT VALUE of the annuity.

- lower, higher - higher , lower

The ______ the annuity payment "PMT", the _______ the FUTURE VALUE of the annuity.

- lower, lower - higher, higher

The ______ the annuity payment "PMT", the _______ the PRESENT VALUE of the annuity.

- lower, lower - higher, higher

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

Businesses demand funds for which of the following reasons?

- to invest in LTA (like PPE) - to satisfy short term working capital

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

The financial sector of U.S. business is the _________ provider of loanable funds and the _________ user of loanable funds.

largest; largest

Due to the value of the conversion option, convertible securities generally pay ________ rate of interest than similar non-convertible securities.

lower

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

lower, lower higher, higher

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

demand; supply

True or false: The equilibrium interest rate is permanent, since it does not change over time.

false

The increase in funds supplied with increasing interest rates will lead to a supply curve that is _________ sloped.

positively

Which of the following is the correct equation for calculating the future value of a lump sum at "n" periods in the FUTURE given interest rate "r"?

FV = PV(1+r)^n

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

budget deficit

Investors demand more funds at lower interest rates because the

cost of borrowing funds is lower.


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