Quiz 5 Fin 320
In which of the following situations would the reserve bank in a certain country be most likely to lower interest rates?
The economy is growing slowly or not at all.
When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.
True
What expectations are investors likely to have about future interest rates?
Interest rates might rise in the future.
Given that the inflation rate in 2006 was about 3.24%, while a short term municipal bond offered a rate of 2.9%, which of the following statement is correct?
Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
When the costs of an investment come before that investment's benefits, what will be the the effect of a rise in interest rates on the attractiveness of that investment to potential investors?
It will make it less attractive, since it will decrease the investment's net present value (NPV).
In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on shortminus and longminus term interest rates in Europe?
Longminus term interest rates will tend to be higher than shortminus term interest rates.
Which of the following statements is FALSE?
The annual percentage rate indicates the amount of interest including the effect of compounding.
Which of the following reasons for considering longminus term loans inherently more risky than shortminus term loans most accurate?
The loan values are very sensitive to changes in market interest rates.
Historically, why have high inflation rates tended to be associated with high nominal interest rates?
The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
What is the shape of the yield curve given in the following term structure? What expectations are investors likely to have about future interest rates? Term 1 year 2 years 3 years 5 years 7 years 10 years 20 years Rate (%) 2.02 2.41 2.77 3.33 3.77 4.13 4.91 What is the shape of the yield curve given the term structure? (Select the best choice below.)
The yield curve is a normal yield curve (increasing).
Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend.
True
What is the effective annual rate (EAR)?
the interest rate that would earn the same interest with annual compounding
Which of the following statements is FALSE?
Fundamentally, interest rates are determined by the Federal Reserve.