ECON 2035 Study Guide - Midterm Guide: Real Interest Rate, Fisher Equation, Nominal Interest Rate

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goldweasel978

19 Feb 2018

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(a) Assume that a one year bond that has no interest coupon payment with a maturity value (face value) of $1,000 sold for $800. What is the interest rate that this bond will pay when it matures? Please show how you got your answer.

(b) If the prices of similar bonds are selling next month for $70, what is the interest rate that these bonds pay now when they mature. Please show how you got your answer.

(c) Please describe the relationship between bond prices and interest rates. Use the numbers above to support your answer.

lavenderpug75

11.1 The four fundamental factors that affect the supply and demand for investment capital that affect interest rates are investment opportunities, time preferences for consumption, risk, and inflation. Explain how each of these factors affects the cost of money.

11.2 The interest rate required by investors on a debt security can be expressed by the following equation:

Interest rate = RRF + IP + DRP + LP + MRP + CRP. Define each term of the equation, and explain how it affects the interest rate.

11.3 Briefly describe the following types of debt: a. Term loan b. Bond c. Mortgage bond d. Senior debt; junior debt, e. Debenture f. Municipal bond

11.4 Indenture Restrictive covenant Trustee Call provision (1) (2) (3) (4). What are the three primary bond rating agencies? What do bond ratings measure? How do investors interpret bond ratings? What is the difference between an A-rated bond and a B-rated bond? Why are bond ratings important to investors? Why are ratings important to businesses that issue bonds?

11.5 What is interest rate risk? What is price risk? What is a reinvestment rate risk?

11.6 Is this statement true or false? The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Explain your answer.

viridiansardine578

6. If there is a shortage of loanable funds, then

a.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
b.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
c.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
d.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

7. We associate the term debt finance with

a.	the bond market and we associate the term equity finance with the stock market.
b.	the stock market and we associate the term equity finance with the bond market.
c.	financial intermediaries and we associate the term equity finance with financial markets.
d.	financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.	and the quantity of loanable funds rises.
b.	and the quantity of loanable funds falls.
c.	rises and the quantity of loanable funds falls.
d.	falls and the quantity of loanable funds rises.

9. Long-term bonds are

a.	riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
b.	riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
c.	less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
d.	less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.	face higher risk and have the potential for higher returns.
b.	face higher risk but receive a fixed payment.
c.	face lower risk and have the potential for higher returns.
d.	face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket', is very similar to a modern bit of advice concerning financial matters:

a.	Buy low-risk bonds.
b.	Use a medium of exchange.
c.	Diversify.
d.	Intermediate.

12. A budget surplus is created if

a.	the government sells more bonds than it buys back.
b.	the government spends more than it receives in tax revenue.
c.	private saving is greater than zero.
d.	None of the above is correct.

greenwildebeest673

ECON 2035 Study Guide - Midterm Guide: Real Interest Rate, Fisher Equation, Nominal Interest Rate

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