chapter 5 conceptual Flashcards
T/F: when you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert future loan payments into money today
true
T/F: when there are are numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high
false
T/F: the annual percentage rate indicates the amount of interest, including the effect of any compounding
false
which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?
the loan will be for a long period of time
what is the effective annual rate (EAR)?
it is the interest rate that would earn the same interest with annual compounding
which of the following best describes the annual percentage rate?
the quoted interest rate which, considered with the compounding period, gives the effective interest rate
which of the following statements is FALSE about interest rates?
the annual percentage rate indicates the amount of interest including the effect of compounding
which of the following is/are TRUE?
only II is true (the APR can never exceed the EAR)
when computing a present value, which of the following is TRUE?
you should adjust the discount rate to match the interval between cash flows
T/F: joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. joe has taken out an amortizing loan
false
T/F: market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend
true
T/F: the real interest rate is the rate of growth of one’s purchasing power due to money invested
false
T/F: quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it
true
which of the following computes the growth in purchasing power?
growth of money / growth of prices
given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct?
investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year
historically, why were high inflation rates associated with high nominal interest rates?
the real interest rate needs to be high enough so that the individuals can expect their savings to have greater purchasing power in the future than in the present
when the costs of an investment come before that investment’s benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?
it will make it less attractive, since it will decrease the investment’s net present value (NPV)
which of the following situations would result in lowering of interest rates by the banking authority of a country?
the economy is slowing down
in which of the following situations would it not be appropriate to use the following formula (long ass formula) when determining the PV of a cash flow stream?
when short-term and long-term interest rates vary widely
in an effort 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 effect of such an action on short-term and long-term interest rates in Europe?
long-term interest rates will tend to be higher than short-term interest rates
which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?
the loan values are very sensitive to changes in market interest rates
which of the following statements is FALSE?
fundamentally, interest rates are determined by the federal reserve
inflation is calculated as the rate of change in the ?
consumer price index
the yield curve is typically ?
upward sloping
