Ch02 - Chapter 2 Determinants of Interest Rates True/False...

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Chapter 2 Determinants of Interest Rates True/False Questions 1. The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption. Answer: True Page: 46 Level: Medium 2. If you earn 0.5% a month in your bank account, this would be the same as earning a 6% annual interest rate with annual compounding. Answer: False Page: 37 Level: Medium 3. In simple interest calculations the interest earned is never added to the principle. Answer: True Page: 29 Level: Easy 4. An investor earned a 6% nominal rate of return over the year. However, over the year prices fell by 2%. The investor's real rate of return was less than their nominal rate of return. Answer: False Page: 46 Level: Easy 5. You were broke, but you just won a lottery that will pay you $1 million in one year. You can truthfully tell all of your friends you are now a millionaire. Answer: False Page: 31 Level: Difficult 6. Everything else equal, the present value of a given future cash flow will increase if you discount at a lower interest rate while the future value of a given amount of cash received today will increase if you compound with a higher interest rate. Answer: True Page: 32 Level: Easy 7. Holding everything else equal, for a given N year annuity, the higher the interest rate the greater the future value of the annuity and the lower the present value of the annuity. Answer: True Page: 35-37 Level: Medium 8. Households generally supply more funds to the markets as their income and wealth increase, ceteris paribus. Answer: True Page: 39 Level: Easy 9. An increase in the perceived riskiness of investments would cause a movement up along the supply curve. Answer: False Page: 38 Level: Medium 10. Ceteris paribus, an increase in the marginal tax rates for all U.S. taxpayers would probably result in reduced supply of funds by households. Answer: True Page: 38 Level: Easy 11. When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve. Answer: True Page: 42 Level: Medium 12. An improvement in economic conditions would likely shift the supply curve down and to the right and shift the demand curve for funds up and to the right. Answer: True Page: 45 Level: Medium 13. The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called default risk. Answer: False Page: 47 Level: Easy 14
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14. Convertible bonds will normally have lower promised yields than straight bonds of similar terms and quality. Answer: True Page: 49 Level: Medium 15. Default risk premiums on investment grade debt typically increase during economic slowdowns. Answer: True
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This note was uploaded on 12/05/2011 for the course ECON 3311 taught by Professor L during the Spring '11 term at University of Texas at Dallas, Richardson.

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Ch02 - Chapter 2 Determinants of Interest Rates True/False...

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