Deck 8: Interest Rates

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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 3

True

Question 4

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 5

Tax deferral on investments may increase the volume of savings.

Question 6

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 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Congress generally gives little consideration to interest rates in its spending programs.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

The nominal interest rate may include a default risk premium.

Question 24

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

Question 25

Treasury notes are intermediate-term Federal debt obligations.

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

The two basic sources of loanable funds are current the expansion of deposits by depository institutions and the generation of reserves through net capital inflows.

Question 40

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

Question 41

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

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

Question 42

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

Question 43

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

Question 44

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 45

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

Question 46

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 47

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)transactions motive,the precautionary motive,and the speculative motive
D)transactions motive,the precautionary motive,and the liquidity preference motive

Question 48

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

A)supply of and demand for liquids such as oil
B)supply of and demand for better returns
C)"flow" of funds over time
D)"flow" of bank credit over time
E)none of the above

Question 49

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

A)supply of and demand for money
B)supply of and demand for loanable funds
C)"flow" of funds over time
D)"flow" of bank credit over time

Question 50

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 51

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

Question 52

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 53

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

Question 54

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

Question 55

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

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 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 58

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 59

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

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

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 62

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 63

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 64

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

A)bankers' acceptance rate
B)prime rate
C)Federal Reserve's discount rate
D)federal funds rate

Question 65

Interest rate differentials 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 66

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 67

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 68

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

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

Question 69

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)not enough information to tell

Question 70

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 71

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 72

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 73

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 74

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 75

Which of the following characteristics of most debt instruments cause bond prices to vary inversely with changes in financial market interest rates?

A)coupon rates
B)maturity dates
C)par redemption values
D)all of the above

Question 76

Interest rate differentials 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 77

Which of the following may accumulate savings?

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

Question 78

Which of the following characteristics of most debt instruments do not cause bond prices to vary inversely with changes in financial market interest rates?

A)coupon rates
B)maturity dates
C)par redemption values
D)bond rating
E)all of the above cause bond prices to vary inversely with changes in financial market interest rates

Question 79

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

Question 80

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

A)risk
B)marketability
C)maturity
D)all of the above
E)none of the above