Chapter 5--The Cost of Mone - Copy

Chapter 5--The Cost of Mone - Copy - Chapter 5-The Cost of...

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Chapter 5--The Cost of Money (Interest Rates) Chapter 5--The Cost of Money (Interest Rates) Student: ___________________________________________________________________________ 1. The nominal rate of interest is defined as the sum of the nominal risk-free rate of return and the expected inflation rate. True False 2. If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase probably will be greater than the increase in rates in the long-term market. True False 3. The term structure is defined as the relationship between interest rates and maturities of similar securities. True False 4. During or near peaks of business activity, yield curves that are flat or downward sloping (possibly with humps) often are prevalent. True False 5. The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates. True False 6. The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing. True False
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deductible expense, it would probably encourage companies to use more debt financing than they presently do, other things held constant. True False 8. The real rate of interest is composed of a risk-free rate of interest plus a premium that reflects the riskiness of the security. True False 9. The yield curve is downward sloping, or inverted, if the long-term rates are higher than the short-term rates. True False 10. The liquidity preference theory states that each borrower and lender has a preferred maturity and that the slope of the yield curve depends on supply and demand for funds in the long-term market relative to the short- term market. True False 11. If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt. True False 12. The two reasons most experts give for the existence of a positive maturity risk premium are (1) because investors are assumed to be risk averse, and (2) because investors prefer to lend long while firms prefer to borrow short. True False 13. An investor with a six-year investment horizon believes that interest rates are determined only by expectations about future interest rates, (i.e., this investor believes in the expectations theory). This investor should expect to earn the same rate of return over the 6-year time horizon if he or she buys a 6-year bond or a 3- year bond now and another 3-year bond three years from now (ignore transaction costs). True False
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This note was uploaded on 01/18/2011 for the course FIN 3604 taught by Professor Patterson during the Spring '10 term at University of South Florida - Tampa.

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Chapter 5--The Cost of Mone - Copy - Chapter 5-The Cost of...

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