Exam 2: Determinants of Interest Rates

An investor requires a 3% increase in purchasing power in order to induce her to lend. She expects inflation to be 2% next year. The nominal rate she much charge is about

You buy an investment today for $9,000. You sell the investment in 120 days for $9,500. The effective annual rate on this investment is

Would you expect the demand curve for businesses to be steeper than the demand curve for funds by the federal government? Explain.

An investor wants to be able to buy 4% more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2%. Which statement(s) below is/are true? I. 4% is the desired real rate of interest II. 6% is the approximate nominal rate of interest required III. 2% is the expected inflation rate over the period

A 15 payment annual annuity has its first payment in 9 years. If the payment amount is $1400 and the interest rate is 7%, what is the most you should be willing to pay today for this investment?

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

When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve.

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

If you earn 0.5% a month in your bank account, this would be the same as earning a 6% annual interest rate with annual compounding.

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?

Explain the market segmentation theory of the term structure.

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

Convertible bonds will normally have lower promised yields than straight bonds of similar terms and quality.

In October 1987 stock prices fell 22% in one day and bond rates fell also. Use the loanable funds theory to explain what happened.

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

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. Perceived risk of financial securities increases II. Near term spending needs decrease III. Future profitability of real investments increases

What is the loanable funds theory of interest rates?

The traditional liquidity premium theory states that long-term interest rates are greater than the average of expected future interest rates.