8) Historically, why were high inlation rates associated with high nominal interest rates?
A) Individuals will spend more when they expect their investments to increase in value.
B) Growth in investment and savings is encouraged when consumers are judged to be
overspending.
C) High inlation leads to a decrease in purchasing power and thus increases the
attractiveness of investment over consumption in the short term.
D) 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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9) When the costs of an investment come before that investment’s beneits, what will be the
efect of a rise in interest rates on the attractiveness of that investment to potential
investors?
A) It will make it more attractive, since it will increase the investment’s net present value
(NPV).
B) It will make it more attractive, since it will decrease the investment’s net present value
(NPV).
C) It will make it less attractive, since it will increase the investment’s net present value
(NPV).
D) It will make it less attractive, since it will decrease the investment’s net present value
(NPV).
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) Which of the following situations would result in lowering of interest rates by the
banking authority of a country?
A) The economy is slowing down.
B) Inlation is rising rapidly.
C) The level of investment is quite high.
D) The rate of savings is quite low.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
31
11)
Term in
years: 2 5 10 30
Rate: 2.25% 3.125% 3.5% 4.375%
The table above shows the interest rates available from investing in risk-free U.S. Treasury
securities with diferent investment terms. If an investment ofers a risk–free cash low of
$100,000 in two years’ time, what is the present value (PV) of that cash low?
A) $76,518
B) $114,777
C) $133,906
D) $95,647
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12)
Term in
years: 1 2 3 4 5
Rate: 1.8% 2.25% 2.30% 2.66% 3.13%
The table above shows the interest rates available from investing in risk-free U.S. Treasury
securities with diferent investment terms. What is the present value (PV) of cash lows
from an investment that yields $6000 at the end of each year for the next four years?
A) $18,111
B) $27,167
C) $31,695
D) $22,639
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
32
13) In which of the following situations would it not be appropriate to use the following
formula:
PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n
when determining the present value (PV) of a cash low stream?
A) when yield curves are lat
B) when short-term and long-term interest rates vary widely
C) when the inlation rate is high
D) when the discount rate is high
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
14) In an efort to maintain price stability, it is expected that the European Central Bank
will raise interest rates in the future. Which of the following is the most likely efect of such
an action on short-term and long-term interest rates in Europe?
A) Long-term interest rates will tend to be higher than short-term interest rates.
B) Long-term interest rates will be about the same as short-term interest rates.
C) Both long- and short-term interest rates would be expected to fall sharply.
D) No relative change in short and long term interest rates could be predicted.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
33
15) Which of the following yield curves would most likely predict a downturn in the
economy?
A)
B)
C)
D)
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16) Term: 1 year 2 years 3 years 5 years 10 years 20 years
Rate: 5.00% 5.20% 5.40% 5.50% 5.76% 5.9%
Given the above term structure of interest rates, which of the following is most likely in the
future?
Option I. Interest rates will fall.
Option II. Economic growth will slow.
Option III. Long-term rates will rise relative to short term rates.
A) Option I only
B) Option II only
C) Option III only
D) Options I and II
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
17) Which of the following reasons for considering long-term loans inherently more risky
than short-term loans is most accurate?
A) There is a greater chance that inlation may fall in a longer time-frame.
B) The penalties for closing out a long term loan early make them unattractive to many
investors.
C) Long-term loans typically have ongoing costs that accumulate over the life of the loan.
D) The loan values are very sensitive to changes in market interest rates.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
35
18) A bank lends some money to a business. The business will pay the bank a single
payment of $176,000 in ten years’ time. How much greater is the present value (PV) of this
payment if the interest rate is 9% rather than 8%?
A) $7178
B) $5742
C) $8613
D) $10,049
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
19) Which of the following statements is FALSE?
A) The interest rates that banks ofer on investments or charge on loans depend on the
horizon of the investment or loan.
B) The Federal Reserve determines very short-term interest rates through its inluence on
the federal funds rate.
C) The interest rates that are quoted by banks and other inancial institutions are nominal
interest rates.
D) Fundamentally, interest rates are determined by the Federal Reserve.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20) If the current inlation rate is 2.0%, then the nominal rate necessary for you to earn
a(n) 7.3% real interest rate on your investment is closest to ________.
A) 11.3%
B) 9.4%
C) 13.2%
D) 15.1%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
36
21) If the current inlation rate is 3.6% and you have an investment opportunity that pays
10.9%, then the real rate of interest on your investment is closest to ________.
A) 8.5%
B) 9.9%
C) 11.3%
D) 7.0%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term 1 year 2 years 3 years 5 years 10 years 20 years
Rate (EAR
%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15%
22) What is the shape of the yield curve and what expectations are investors likely to have
about future interest rates?
A) inverted; higher
B) normal; higher
C) inverted; lower
D) normal; lower
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
37