chapter 5 conceptual

Question 1

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

Answer 1

true

Question 2

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

Answer 2

false

Question 3

T/F: the annual percentage rate indicates the amount of interest, including the effect of any compounding

Answer 3

false

Question 4

which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

Answer 4

the loan will be for a long period of time

Question 5

what is the effective annual rate (EAR)?

Answer 5

it is the interest rate that would earn the same interest with annual compounding

Question 6

which of the following best describes the annual percentage rate?

Answer 6

the quoted interest rate which, considered with the compounding period, gives the effective interest rate

Question 7

which of the following statements is FALSE about interest rates?

Answer 7

the annual percentage rate indicates the amount of interest including the effect of compounding

Question 8

which of the following is/are TRUE?

Answer 8

only II is true (the APR can never exceed the EAR)

Question 9

when computing a present value, which of the following is TRUE?

Answer 9

you should adjust the discount rate to match the interval between cash flows

Question 10

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

Answer 10

false

Question 11

T/F: market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend

Answer 11

true

Question 12

T/F: the real interest rate is the rate of growth of one’s purchasing power due to money invested

Answer 12

false

Question 13

T/F: quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it

Answer 13

true

Question 14

which of the following computes the growth in purchasing power?

Answer 14

growth of money / growth of prices

Question 15

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?

Answer 15

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

Question 16

historically, why were high inflation rates associated with high nominal interest rates?

Answer 16

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

Question 17

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?

Answer 17

it will make it less attractive, since it will decrease the investment’s net present value (NPV)

Question 18

which of the following situations would result in lowering of interest rates by the banking authority of a country?

Answer 18

the economy is slowing down

Question 19

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?

Answer 19

when short-term and long-term interest rates vary widely

Question 20

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?

Answer 20

long-term interest rates will tend to be higher than short-term interest rates

Question 21

which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?

Answer 21

the loan values are very sensitive to changes in market interest rates

Question 22

which of the following statements is FALSE?

Answer 22

fundamentally, interest rates are determined by the federal reserve

Question 23

inflation is calculated as the rate of change in the ?

Answer 23

consumer price index

Question 24

the yield curve is typically ?

Answer 24

upward sloping