Exam 2: Determinants of Interest Rates

Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to ________ (to the nearest penny).

YIELD CURVE FOR ZERO COUPON BONDS RATED AA Assume that there are no liquidity premiums. To the nearest basis point,what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?

You buy a car for $38,000. You agree to a 60-month loan with a monthly interest rate of 0.55 percent. What is your required monthly payment?

According to the market segmentation theory,short-term investors will not normally switch to intermediate- or long-term investments.

An increase in interest rates increases the demand loanable funds.

As the liquidity of corporate bonds decrease,the risk premium required on those bonds decrease as well.

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

The relationship between maturity and yield to maturity is called the ________.

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent,what was the investor's actual real after-tax rate of return?

According to the liquidity premium theory,investors preferring long-term bonds over short-term bonds would require lower liquidity premium.

With a zero interest rate both the present value and the future value of an N payment annuity would equal N × payment.

An investor earned a 5 percent nominal risk-free rate over the year. However,over the year,prices increased by 2 percent. The investor's real risk-free rate was less than his nominal rate of return.

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

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?

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.

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

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

According to the liquidity premium theory of interest rates,

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?

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.