Chapter 2

Question 1

The Balance Sheet

Answer 1

Investments=Financing
Total Assets=Total Liabilities and Equity

Question 2

Time preferences for consumption

Answer 2

Greater time preference for consumption generally leads to higher interest rates

Question 3

Risk

Answer 3

Investors demand higher returns for taking greater risks

Question 4

Production opportunities

Answer 4

An increase in production opportunities normally results in an increase in interest rates

Question 5

Inflation

Answer 5

Higher inflation expectations lead to higher interest rates

Question 6

r

Answer 6

the nominal rate of any investment, which includes a risk premium (RP)
and an inflation premium

Question 7

r*

Answer 7

the real risk-free rate of return, which does not include investors’
inflation expectations

Question 8

r(v)RF

Answer 8

nominal risk-free rate, which includes an inflation premium

Question 9

IP

Answer 9

the average inflation rate expected during the life of the investment

Question 10

r (v) RF

Answer 10

r* + IP

Question 11

r

Answer 11

rRF+ RP