Deck 8: Interest Rates

Question 1

Interest rates will move from one equilibrium level to another if an anticipated change occurs that causes the demand for loanable funds to change.

Answer 1

True

Question 2

An economy with a large share of young people will have more total savings than one with more late middle-aged people.

Answer 2

False

Question 3

There are two basic sources of loanable funds: current savings and the expansion of deposits of depository institutions.

Answer 3

True

Question 4

While the Federal Reserve strongly influences the supply of funds, the Treasury's major influence is on the demand for funds, as it borrows heavily to finance federal deficits.

Question 5

The maturity risk premium is the compensation expected by investors due to interest rate risk on debt instruments with longer maturity.

Question 6

The liquidity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Question 7

Treasury bonds may be issued with any maturity but generally have an original maturity in excess of one year.

Question 8

The loanable funds theory states that interest rates are a function of the supply of and demand for loanable funds.

Question 9

The liquidity premium is compensation for those financial debt instruments that cannot be easily converted to cash at prices close to their estimated fair market values.

Question 10

Interest rates in the United States are only influenced by domestic factors.

Question 11

There is an inverse relation between debt instrument prices and nominal interest rates in the marketplace.

Question 12

The default risk premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Question 13

The most important holders of Treasury bills are corporations and individuals.

Question 14

Interest rates generally fall during periods of economic expansion and rise during economic contraction.

Question 15

A "shock" may be defined as an unanticipated change that will cause the demand for, or supply of loanable funds to change.

Question 16

The interest rate that is observed in the marketplace is called a real interest rate.

Question 17

The shorter the maturity of a fixed-rate debt instrument, the greater the reduction in its value to a given interest rate increase.

Question 18

The interest rate is the basic price that equates the demand for supply of loanable funds in the financial markets.

Question 19

The term structure of interest rates indicates the relation between interest rates and the maturity of comparable quality debt instruments.

Question 20

The maturity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Question 21

The risk-free rate of interest is equal to the real rate of interest plus a premium for inflation.

Question 22

Holding demand constant, a decrease in the supply of loanable funds will result in an increase in interest rates.

Question 23

Holding supply constant, an increase in the demand for loanable funds will result in a decrease in interest rates.

Question 24

The expectations theory contends that the shape of the yield curve reflects investor expectations about future GDP growth rates.

Question 25

Holding demand constant, an increase in the supply of loanable funds will result in an increase in interest rates.

Question 26

Holding supply constant, a decrease in the demand for loanable funds will result in a decrease in interest rates.

Question 27

The demand for loanable funds comes from all sectors of the economy.

Question 28

Inflation is an increase in the price of goods or services that is not offset by an increase in quality.

Question 29

Tax deferral on investments may increase the volume of savings.

Question 30

The Treasury's major influence through its borrowing to finance federal deficits is on the supply rather than demand for loanable funds.

Question 31

Business will increase current long-term borrowing if they forecast a decrease in interest rates.

Question 32

In general, short-term interest rates are more stable than long-term interest rates.

Question 33

If the Fed changes discount policies it may affect the supply of loanable funds.

Question 34

Treasury notes are intermediate-term Federal debt obligations.

Question 35

Demand-pull inflation may be defined as an excessive demand for goods and services during periods of economic expansion as a result of large increases in the money supply.

Question 36

The nominal interest rate may include a default risk premium.

Question 37

Cost-push inflation occurs when prices are raised to cover rising production costs, such as wages.

Question 38

The market segmentation theory holds that securities of different maturities are not perfect substitutes for each other.

Question 39

The maturity risk premium is the added return expected by lenders because of the expectation of inflation.

Question 40

The liquidity preference theory holds that securities of different maturities are not perfect substitutes for each other.

Question 41

The liquidity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Question 42

As interest rates rise, the prices of existing bonds will:

A)rise
B)stay the same
C)fall
D)either a or b, depending on the state of the economy

Question 43

Cost-push inflation during economic expansions when demand for goods and services is greater than supply.

Question 44

The risk free rate of interest is the interest rate on a debt instrument with no default, maturity, or liquidity risks.

Question 45

The majority of marketable interest-bearing government obligations have a maturity of more than 5 years.

Question 46

Administrative inflation is the tendency of prices, aided by union-corporation contracts, to rise during economic expansion and to resist declines during recessions.

Question 47

The risk-free rate of interest is found by combining the real rate of interest and the rate paid on U.S.Treasury debt.

Question 48

In an inflationary period, interest rates have a tendency to:

A)rise
B)fall
C)stay the same
D)act erratically

Question 49

The maturity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Question 50

The liquidity preference theory holds that interest rates are determined by the:

A) investor preference for short-term securties
B) investor preference for higher-yielding long-term securities.
C) “flow” of funds over time
D) “flow” of bank credit over time

Question 51

Default risk is the risk that a borrower will not pay interest and/or repay the principal on a loan or other debt instrument according to the agreed contractual terms.

Question 52

The nominal rate of interest is equal to the real rate of interest plus an inflation premium plus the default risk premium plus the maturity risk premium plus the liquidity risk premium.

Question 53

The basic price that equates the demand for and supply of loanable funds in the financial markets is the __________:

A)interest rate
B)yield curve
C)term structure
D)cash price
E)none of the above

Question 54

The basic motives for holding money rather than investments are the:

A)transactions motive and the precautionary motive
B)transactions motive and the liquidity preference motive
C)treasury motive, the pecuniary motive, and the speculative motive
D)transactions motive, the precautionary motive, and the liquidity preference motive
E)none of the above

Question 55

Speculative inflation is caused by the expectation that prices will continue to rise, resulting in increased buying to avoid even higher future prices.

Question 56

Three theories commonly used to explain the term structure of interest rates are the expectations theory, the liquidity preference theory, and the market segmentation theory.

Question 57

The default risk premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Question 58

As interest rates fall, the prices of existing bonds will:

A)rise
B)stay the same
C)fall
D)either a or b, depending on the state of the economy
E)none of the above

Question 59

The liquidity preference theory holds that interest rates are determined by the:

A)supply of and demand for moneyinvestor preference for short-term securties
B)supply of and demand for loanable fundsinvestor preference for higher-yielding long-term securities.
C)"flow" of funds over time
D)"flow" of bank credit over time

Question 60

Speculative inflation is the tendency of prices, aided by union-corporation contracts, to rise during economic expansion and to resist declines during recessions.

Question 61

If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace on short term treasury securities?

A)8%
B)7%
C)6%
D)5%

Question 62

Which of the following is not considered to be a basic theory used to explain the term structure of interest rates?

A)expectations theory
B)loanable funds theory
C)liquidity premium theory
D)market segmentation theory
E)all of the above are theories used to explain the term structure of interest rates.

Question 63

If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace under the simplest form of market interest rates?

A)4%
B)7%
C)2%
D)1%

Question 64

Three theories commonly used to explain the term structure of interest rates include all of the following EXCEPT

A)the default risk theory
B)the expectations theory
C)the market segmentation theory
D)the liquidity preference theory

Question 65

Which of the following interest rates are not determined in the money market?

A)U.S.Treasury bill rate
B)prime rate
C)commercial paper rate
D)federal funds rate
E)all are determined in the money market

Question 66

Which of the following may accumulate savings?

A)individuals
B)corporations
C)governmental units
D)all the above may have savings

Question 67

Sources of loanable funds do not include:

A)current savings
B)the expansion of deposits by depository institutions
C)federal deficits
D)all the above are sources of loanable funds

Question 68

Interest rate differentialsA maturity risk premium at a certain point in time may be expressed by comparing the interest rates on:

A)a Treasury bill and a Treasury bond
B)a Treasury bill and a long-term corporate bond
C)a Treasury bill and the commercial paper rate
D)a risky security and a comparable maturity U.S.Treasury security
E)none of the above

Question 69

A basic source of loanable funds is:

A)current savings that flow through financial institutions
B)future savings and investment by the Federal Reserve
C)current and future savings
D)investment by the Federal Reserve and expansion of deposits by insurance companies

Question 70

An unexpected increase in inflation should:

A)increase the demand for loanable funds
B)decrease the interest rate on loans
C)increase the interest rate on loans
D)none of the above

Question 71

Interest rate differentialsThe default risk premium at a certain point in time may be expressed by comparing the interest rates on:

A)a Treasury bill and a Treasury bond
B)a Treasury bill and a long-term corporate bond
C)a Treasury bill and the commercial paper rate
D)a risky security and a comparable maturity U.S.Treasury security

Question 72

Which of the following factors directly impact the level of interest rates?

A)risk
B)marketability
C)maturity
D)all of the above

Question 73

The basic sources of loanable funds are:

A)short-term funds and currency
B)current savings and the creation of new funds through the expansion of credit by depository institutions
C)contractual savings and commercial bank credit
D)bank loans and the creation of new funds through the contraction of credit by depository institutions

Question 74

Which of the following interest rates are not determined in the money market?

A)U.S.Treasury bill rate
B)prime rate
C)commercial paper rate
D)federal funds rate

Question 75

Which of the following is not considered to be a basic theory used to explain the term structure of interest rates?

A)expectations theory
B)loanable funds theory
C)liquidity premium theory
D)market segmentation theory
E)two of the above are not considered to be a basic theory Don't like "two of the above" responses as we don't know which 2 the student identifies as correct.Item #10 is an identical item w/o this problem.

Question 76

Which of the following is not considered to be a basic theory used to explain the term structure of interest rates?

A)expectations theory
B)loanable funds theory
C)liquidity premium theory
D)market segmentation theory

Question 77

Of the following, the most sensitive interest rate in the money market is the:

A)bankers' acceptance rate Not in chapter
B)prime rate
C)Federal Reserve's discount rate
D)federal funds rate

Question 78

Which of the following costs serves to compensate the lender for loss of liquidity?

A)administrative costs of making the loan
B)cost of paying for the risk involved
C)cost to offset the likelihood of inflation
D)cost for use of money during the period of the loan

Question 79

Long-run inflation expectations in the capital markets can be estimated by:

A)subtracting a real return component from the rate on short-term Treasury bills
B)adding a real return component to interest rates on long-term corporate bonds
C)subtracting a real return component from the rate on long-term Treasury securities
D)adding a real return component to interest rates on short-term corporate securities

Question 80

As the economy begins moving out of a recessionary period, the yield curve is generally:

A)upward sloping
B)flattened out
C)downward sloping
D)discontinuous