Unformatted text preview: /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: 47 Level: Medium 2. At a peak in economic activity the term structure usually switches from a downward slope to flat.
Answer: False Page: 54 Level: Medium 3. A monthly interest rate of 1% is equivalent to a 12% annual interest rate with annual compounding.
Answer: False Page: 26-27 Level: Medium 4. In simple interest calculations the interest earned is never added to the principle.
Answer: True Page: 26-27 Level: Easy 5. Cash flows of $500 in one month, $500 in 3 months and $500 in 6 months comprise an annuity.
Answer: False Page: 28 Level: Easy 6. You just won a lottery that has a present value of $20 million. However, you will actually receive 20
annual installment payments over the next 20 years, beginning in one year. If the interest rate is greater
than zero you can expect each installment to be less than $1 million.
Answer: False Page: 32 Level: Difficult 8 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 7. Everything else equal, the present value of a given future cash flow will increase if you use a higher
interest rate while the future value of a given amount of cash received today will decrease if you use a
higher interest rate.
Answer: False Page: 34 Level: Easy 8. 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: 33-34 Level: Medium 9. If you buy a single payment security you will receive interest in 6 months and at maturity.
Answer: False Page: 36-37 Level: Easy 10. Everything else equal, a bond equivalent yield will be greater than an effective annual yield
Answer: False Page: 32-37 Level: Easy 11. The household sector is the largest supplier of loanable funds.
Answer: True Page: 37-38 Level: Easy 12. The greater is household wealth, the greater the amount of loanable funds they demand, ceteris paribus.
Answer: False Page: 40 Level: Easy 13. An increase in the perceived riskiness of investments would cause a movement up along the supply
Answer: False Page: 42 Level: Medium 14. Ceteris paribus, a decline in the government budget deficit would tend to increase U.S. interest rates.
Answer: False Page: 40 Level: Medium
15. 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: 41 Level: Medium
Saunders, Financial Markets and Institutions, 2/e 9 16. An increase in loan origination fees by all banks would shift the demand for funds up and to the left.
Answer: False Page: 38 Level: Medium 17. 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 th...
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