Exam 2: Determinants of Interest Rates

We expect liquidity premiums to move inversely with interest rate volatility.

Upon graduating from college this year,you expect to earn $25,000 per year. If you get your MBA,in one year you can expect to start at $35,000 per year. Over the year,inflation is expected to be 5 percent. In today's dollars,how much additional (less)money will you make from getting your MBA (to the nearest dollar)in your first year?

Which of the following bond types pays interest that is exempt from federal taxation?

What is the difference between the expected real interest rate and the real risk-free interest rate actually earned?

Simple interest calculations assume that interest earned is never reinvested.

An improvement in economic conditions would likely shift the supply curve down and to the right and shift the demand curve for funds up and to the right.

An annuity and an annuity due with the same number of payments have the same future value if r = 10%. Which one has the higher payment?

Households generally supply more funds to the markets as their income and wealth increase,ceteris paribus.

Of the following,the most likely effect of an increase in income tax rates would be to

Earning a 5 percent interest rate with annual compounding is better than earning a 4.95 percent interest rate with semiannual compounding.

What is the loanable funds theory of interest rates?

An increase in the perceived riskiness of investments would cause a movement up along the supply curve.

According to current projections,Social Security and other entitlement programs will soon be severely underfunded. If the government decides to cut Social Security benefits to future retirees and raise Social Security taxes on all workers,what will probably happen to the supply of funds available to the capital markets? What will be the effect on interest rates?

A foreign investor placing money in dollar-denominated assets desires a 4 percent real rate of return. Global inflation is running about 3 percent,and the dollar is expected to decline against her home currency by 1.5 percent over the investment period. What is her minimum required rate of return? Explain.

For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows,and the future value of the same annuity will be greater than the sum of the cash flows.

Who are the major suppliers and demanders of funds in the United States and what is their typical position?

Can the actual real rate of interest be negative? When? Can the expected real rate be negative?

Classify each of the following in terms of their effect on interest rates (increase or decrease): I. Covenants on borrowing become more restrictive. II. The Federal Reserve increases the money supply. III. Total household wealth increases.

Suppose you borrow $15,000 and then repay the loan by making 12 monthly payments of $1,297.92 each. What rate will you be quoted on the loan?

An insurance company is trying to sell you a retirement annuity. The annuity will give you 20 payments with the first payment in 12 years when you retire. The insurance firm is asking you to pay $50,000 today. If this is a fair deal,what must the payment amount be (to the dollar)if the interest rate is 8 percent?