Deck 8: Interest Rates

Question 1

Tax deferral on investments may increase the volume of savings.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

The rapid economic expansion after the Civil War caused the first period of falling interest rates, from 1864 to 1873.

Answer 3

False

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

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

Question 6

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

Question 7

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

Question 8

The supply of savings comes from all sectors of the economy.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Equilibrium interest rate is the tax rate that equates the demand for and supply of loanable funds.

Question 18

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

Question 19

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

Question 20

Loanable funds amount of money made available by the government to borrowers.

Question 21

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 22

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

Question 23

Beginning in 1966, interest rates entered a period of unusual increases, leading to the highest rates in U.S. history.

Question 24

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

Question 25

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

Question 26

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

Question 27

The major factor that determines the volume of savings, corporate as well as individual, is the level of national taxation. Lower levels of taxation lead to higher levels of savings.

Question 28

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

Question 29

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

Question 30

The observed market interest rate (r) can be expressed as r = RR x IP.

Question 31

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 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

Historically, one of the biggest borrowers has been the federal government.

Question 37

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

Question 38

Treasury notes are intermediate-term Federal debt obligations.

Question 39

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

Question 40

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

Question 41

Special Treasury bills are government securities that cannot be transferred between persons or institutions and must be redeemed with the U.S. government,

Question 42

A dealer cartel is a small group of dealers in government securities with an effective marketing network throughout the United States,

Question 43

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 44

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

Question 45

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 46

Treasury securities that may be bought and sold through the customary market channels are called Treasury bills.

Question 47

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

Question 48

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 49

Treasury bonds are government securities issued with maturities ranging from 11 to 50 years.

Question 50

Investment grade bonds have ratings of Aaa or higher that meet financial institution investment standards.

Question 51

Junk bonds are bonds that have a relatively high probability of default.

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

The nominal interest rate may include a default risk premium.

Question 59

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 60

Speculative inflation is aided by union-corporation contracts.

Question 61

Sources of loanable funds do not include:

A) current savings
B) the expansion of deposits by depository institutions
C) federal deficits
D) unissued treasury bonds

Question 62

Federal obligations are not subject to state inheritance, estate, or gift taxes.

Question 63

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 64

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

Question 65

Junk bonds and high-yield bonds are the same thing.

Question 66

An increase in the demand for loanable funds, holding supply constant, will cause interest rates to:

A) increase
B) decrease
C) stay the same
D) increase rapidly then decrease rapidly

Question 67

Treasure notes are issued in 1-year, 2-year, 5-year, 10-year, and 15-year notes.

Question 68

Which of the following does not accumulate savings?

A) individuals
B) corporations
C) governmental units
D) federal government

Question 69

It is illegal for individuals to own Treasury notes in this country.

Question 70

Treasury notes are held largely by private investors.

Question 71

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 72

A decrease in the demand for loanable funds, holding supply constant, will cause interest rates to:

A) increase
B) decrease
C) stay the same
D) decrease rapidly then increase slowly

Question 73

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

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

Question 74

The default risk premiums on Baa corporate bonds are generally better indicators of investor pessimism or optimism about economic expectations than are those on Aaa-rated bonds.

Question 75

The Public Debt Act of 1941 prohibits the federal government from issuing tax-free obligations.

Question 76

An increase in the supply for loanable funds, holding demand constant, will cause interest rates to:

A) increase
B) decrease
C) stay the same
D) increase slowly then decrease rapidly

Question 77

Income from the obligations of the federal government is exempt from all state and local taxes.

Question 78

A decrease in the supply for loanable funds accompanied by a decrease in demand will cause interest rates to:

A) increase
B) decrease
C) stay the same
D) not enough information to tell

Question 79

A decrease in the supply for loanable funds, holding demand constant, will cause interest rates to:

A) increase
B) decrease
C) stay the same
D) decrease slowly then increase slowly

Question 80

The interest on all federal obligations is exempt from federal income taxes.