Chapter 5 Flashcards
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
APR Calc
Monthly discount rate calc
Which of the following statements is false?
A) The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan.
B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates.
D) Fundamentally, interest rates are determined by the Federal Reserve.
D
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
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
Which of the following statements is false?
A) The plot of the relationship between the investment risk and the interest rate is call the yield curve.
B) Each of the last six recessions in the United States was preceded by a period with an inverted yield curve. C) The nominal interest rate does not represent the increase in purchasing power that will result from investing D) A risk-free cash flow received in two years should be discounted at the two-year interest rate.
A
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
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
C
Which of the following statements is false?
A) When we refer to the “risk-free interest rate,” we mean the rate on U.S. Treasuries.
B) Interest rates vary with the investment horizon.
C) All borrowers, besides the U.S. Treasury, have some risk of default.
D) When interest on a loan is tax deductible, the effective after-tax interest rate is τ × (1 - r).
D
Which of the following statements is false?
A) The equivalent after-tax interest rate is r - (τ × r).
B) Interest rates vary based on the identity of the borrower.
C) The ability to deduct the interest expense increases the effective after-tax interest rate paid on the loan.
D) For loans to borrowers other than the U.S. Treasury, the stated interest rate is the maximum amount that investors will receive.
C
Which of the following statements is false?
A) U.S. Treasury securities are widely regarded to be risk-free because there is virtually no chance the government will default on these bonds.
B) In general, if the interest rate is r and the tax rate is τ, then for each $1 invested you will earn interest equal to r and owe taxes of τ × r on the interest.
C) Investors may receive less than the stated interest rate if the borrowing company has financial difficulties and is unable to fully repay the loan.
D) Taxes reduce the amount of interest the investor can keep, and we refer to this reduced amount as the tax effective interest rate.
D
Which of the following statements is false?
A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.
B) The equivalent after-tax interest rate is r(1 - τ).
C) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term.
D) To compensate for the risk that they will receive less if the firm defaults, investors demand a lower interest rate than the rate on U.S. Treasuries.
D
Which of the following statements is false?
A) The investor’s opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.
B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk.
C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment.
D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
D
Which of the following statements is false?
A) The actual return kept by an investor will depend on how the interest is taxed.
B) The equivalent after-tax interest rate is r(1 - τ)
C) The highest interest rate, for a given horizon, is the rate paid on U.S. Treasury securities.
D) It is important to use a discount rate that matches both the horizon and the risk of the cash
C
