Chapter 5 Flashcards
(12 cards)
Which of the following statements is FALSE?
A) Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.
B) The effective annual rate indicates the amount of interest that will be earned at the end of one year.
C) The annual percentage rate indicates the amount of simple interest earned in one year.
D) The annual percentage rate indicates the amount of interest including the effect of compounding
D
2) Which of the following statements is FALSE?
A) The relationship between the investment term and the interest rate is called the term structure of interest rates.
B) Real interest rates indicate the rate at which your money will grow if invested for a certain period. C) The yield curve is a potential leading indicator of future economic growth.
D) The shape of the yield curve will be strongly influenced by interest rate expectations.
B
3) Which of the following statements is FALSE?
A) The yield curve changes over time.
B) The formulas for computing present values of annuities and perpetuities cannot be used in situations in which cash flows need to be discounted at different rates.
C) We can use the term structure to compute the present and future values of a risk-free cash flow over different investment horizons.
D) The yield curve tends to be inverted as the economy comes out of a recession
D
5) Which of the following statements is FALSE?
A) An inverted yield curve generally signals an expected decline in future interest rates.
B) An inverted yield curve is often interpreted as a positive forecast for economic growth.
C) All the formulas for computing present values of annuities and perpetuities are based upon discounting all of the cash flows at the same rate.
D) The rate of growth of your purchasing power is determined by the real interest rate.
B
Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend.
T
Historically, why were high inflation rates associated with high nominal interest rates?
Question content area bottom
Part 1
A.
Growth in investment and savings is encouraged when consumers are judged to be overspending.
B.
The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
C.
Individuals will spend more when they expect their investments to increase in value.
D.
High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term.
B
What is the effective annual rate (EAR)?
Question content area bottom
Part 1
A.
It is the interest rate for an nyear time interval, where n may be more than one year or less than or equal to one year (a fraction).
B.
It is the ratio of the number of the annual percentage rate to the number of compounding periods per year.
C.
It is the interest rate that would earn the same interest with annual compounding.
D.
It refers to the cash flows from an investment over a oneyear period divided by the number of times that interest is compounded during the year.
C
Annual Percentage Rates (APR)
Indicates the amount of simple interest earned in one
year, that is the amount of interest without the effect of
compounding
Nominal Interest Rates
The rate at which your money will grow if invested for a
certain period
– Real Interest Rate
The rate of growth of your purchasing power, after
adjusting for inflation
Interest Rate Determination
§ If interest rates are expected to rise, long-term interest
rates will tend to be higher than short-term rates to
attract investors
§ If interest rates are expected to fall, long-term rates will
tend to be lower than short-term rates to attract
borrowers
