FIN3403 Chapter Notes - Chapter 6: Risk-Free Interest Rate, Interest Rate Risk, Interest Rate

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azureswan19

28 Mar 2019

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Inflation the amount by which prices increase over time. Interest rate paid to savers depend on the rate of return that producers expect to earn on invested capital savers" time preferences for current versus future consumption the riskiness of the loan the expected future rate of inflation. Inflation has a major impact on interest rates because it erodes the real value of what you receive from the investment. Lp is liquidity premium: a premium added to the equilibrium interest rate on a security if that security cannot be converted to cash on short notice and at close to it"s fair market value. Long term treasury ip and mrp: short term treasury -ip, short term corporate ip, drp, and lp. Long term rates have smaller increase in yield curve: constructing the yield curve: inflation, find the average expected inflation rate for years 1 to year n.

Related Questions

Which of the following is an advantage of convertible bonds?

		Investors can convert the bonds into higher coupon ratebonds.
		Investors can choose to hold the company's bonds or convert thebonds into its stock.
		Investors are paid a penalty on the conversion of the bonds.
		Investors are redeemed for the difference between the face valueand the market price on redemption of the bonds.
		Investors can claim interest for the remaining life of the bondson the bonds' early conversion.

5 points

QUESTION 2

If the Federal Reserve loosens money supply then:

inflation will decrease.

interest rates will decrease.

sale of Treasury securities will increase.

credit supply will decrease.

economic activity will decrease.

5 points

QUESTION 3

A bond purchased for $950 was sold for $980 after one year. Theinterest received during the year is $25. The bond's yield is:

2.23%

5.79%

8.12%

5.25%

9.36%

5 points

QUESTION 4

Investors with a _____ will demand a higher rate of return.

higher time preference for consumption

lower exposure to economic risks

lower access to production opportunities

higher financial creditworthiness

lower default premium

amberwallaby273

The study of finance consists of the following interrelated area(s):

a) Financial markets and institutions

b) Financial services

c) Investments

d) Managerial (business finance)

e) All of the above

The liquidity asset is one that can be easily converted to __________ without significant loss of its original value.

a) Bonds

b) Cash

c) Gold

d) Liquid

e) Silver

A goal of financial intermediaries is to improve the economic well-being. Other benefits include:

a) Diversification (risk)

b) Financial flexibility

c) Funds divisibility/pooling

d) Reduced costs

e) Related services

f) All of the above

4.____________ represents the current value of some future amount.

a)Assumed value

b)Future value

c)Present value

d)Zero value

The cost of money (interest rates) is based on (1) the rate of return that borrowers expect to earn on their investments, (2) saversâ preferences to spend income in the current period rather than delay consumption until some future period, _____________________________, and (4) expected inflation.

a) the level of economic activity

b) the risks associated with investments/loans

c) the trade deficit

d) the yield, or return that is earned on an investment

6.Short-term debt includes all of the following EXCEPT:

a)Bankerâs Acceptances

b)Certificates of Deposits (CDâs)

c)Commercial Paper

d)Eurodollar Deposits

e)Federal Funds

f)Government Bonds

g)Money Market Mutual Funds

h)Repurchase Agreements (Repos)

i)Treasury Bills (T-bills)

7.Common stockholders are usually referred to as the owners of the firm because investors in common stock have certain rights and privileges generally associated with ________________.

a)Contracts

b)Income stocks

c)Property ownership

d)Treaties

8.The concept of reducing the stand-alone risk of an individual investment by combining it with other investments to form a portfolio is called ______________.

a)Correlation coefficient

b)Diversification

c)Realized rate of return

d)Risk aversion

9.A _____________ is defined as the cash flows that could be generated from assets the firm already owns if they are not used for the project in question.

a)Balance Sheet

b)Budget

c)Income Statement

d)Opportunity Cost

e)Sunk Cost

To determine its required rate of return, the firm must compute the cost of each source of funds of capital that investors provide; that is, the firm must compute the ___________, the cost of preferred stock, the cost of retained earnings, and the cost of new common equity.

a) Cost of debt

b) Cost of equity

c) Cost of living

d) Cost of unemployment

ivorybat714

1.Which one of the following is NOT involved in the process of issuing new finanial securities?

a) Securities and Exchange Commission(SEC)

b) Investos in the secondary markets

c) underwriting investment bank or syndicate

d) The firm

2. Which of the following statement is FALSE?

a) Bank requires the possibility of atleast one outcome less favorable than the expected value

b) probability distribution is described by a list of favorable and unfavorable events and their likelihood

c) Preferred stocks are less risky than common stocks because prefferes dividends are generally fixed

d) Standard deviation is a measure of market risk and, therefore is useful in evaluating the risk of a portofolio

3. Which one of the following statements is FALSE?

a) future value of an investment increases as the number of compund periods per year increases.

b) if you only earned interest on your initial investment, and not onpreviously earned interest, it would be called simple interest

c) present value of a future cash flow increases as the rate of return increases

d) time value of money is the opportunity cost of passing up he earning potential of a dollar today

4. Which of the following is NOT an example of an annuity?

a) interest received on a bond

b) monthly payments paid on a car loan

c) mortgage payments on a fixed-rate mortgage

d) dividend on a commo stock

5. All of the following are financial assets EXCEPT___________

a) Bankerâs acceptance

b) Preferred stock

c) Mortgage back security

d) Brand name

6. Which of the following statements is FALSE?

a) The value of a firm depends o the cash flows is expected to generate in the future

b) Current cash is more valuable than cash in the future

c) All else equal, certain cash flows are preferred to uncertain cash flows

d) The primay goal of a publicly-owed corporation is to maaximize dividend payments.

7. All of the following are the primary tools of the Federal Reserve âmonetary policyâ EXCEPT

a) The income tax rate

b) Open market operations

c) The required reserves

d) The short-term interest rate

8.Which of the following is NOT an advantage of going public or an initial public offering(IPO)?

a) Establish value for firm

b) Possible loss of control

c) Ease of raising funds later

d) Diversification for owners

9. All of the following ae an example of a financial intermediary,EXCEPT____________

a) Associated Credit Union of Texas

b) Canada Pension Plan(CPP)

c) Morgan Stanley investment bank

d)American Funds New Perspective Fund

ceriselizard402

FIN3403 Chapter Notes - Chapter 6: Risk-Free Interest Rate, Interest Rate Risk, Interest Rate

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Related Questions

		inflation will decrease.
		interest rates will decrease.
		sale of Treasury securities will increase.
		credit supply will decrease.
		economic activity will decrease.

		higher time preference for consumption
		lower exposure to economic risks
		lower access to production opportunities
		higher financial creditworthiness
		lower default premium

		2.23%
		5.79%
		8.12%
		5.25%
		9.36%