ch.5 finance

When there are large numbers of people looking to save their money and there is little demand 2)for loans, one would expect interest rates to be high. T/F false
n which of the following situations would it not be appropriate to use the following formula: PV=C0 +C1/(1+r)+C2/(1+r)2+. . . .+Cn/(1+r)nwhen determining the present value (PV) of a cash flow stream? A) when the discount rate is highB) when yield curves are flatC) when the inflation rate is highD) when short-term and long-term interest rates vary widely D
Which of the following best describes the annual percentage rate? A) the quoted interest rate which, considered with the compounding period, gives theeffective interest rateB) the discount rate, when effective annual rate is divided by the number of times it iscompounded in a yearC) the effective annual rate, after compounding is taken into accountD) the discount rate, when compounded more than once a year or less than once a year A
Which of the following statements is FALSE?A) The interest rates that are quoted by banks and other financial institutions are nominalinterest rates.B) Fundamentally, interest rates are determined by the Federal Reserve.C) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate.D) The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. B
The annual percentage rate indicates the amount of interest, including the effect of anycompounding. T/F FALSE
Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compoundedmonthly, at the end of three years. Joe has taken out an amortizing loan. T/F FALSE
The real interest rate is the rate of growth of one’s purchasing power due to money invested. T/F FALSE
Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend. T/F FALSE
Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?A) The loan will be for a long period of time.B) The borrower is judged to have a low degree of risk.C) The number of borrowers seeking funds is low. D) The expected inflation rate is expected to be low. A
Historically, why were high inflation rates associated with high nominal interest rates?A) Individuals will spend more when they expect their investments to increase in value.B) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term.C) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.D) Growth in investment and savings is encouraged when consumers are judged to be overspending. C
Quality adjustments to changes in the CPI most often result in reductions to the inflation ratecalculated from it. T/F TRUE
When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today. T/F TRUE
interest rate is the price of using money
the interest rate on your loan is the price you pay to be able to convert your future loan payment into a car today
effective annual rate or annual percentage yield the total amount of interest that will be earned at the end of one year
when computing present or future values, you should adjust the discount rate to match the time period of the cash flows
APR is a way of quoting te actual interest earned each compounding period, cannot be used itself as a discount rate
the EAR increases with the frequency of compounding because of the ability to earn interest on interest sooner
amortizing loans each month you pay interest on the loan plus some part of the loan balance, monthly payments are the same
the present value of what you will give the bank, discounted at the loan’s interest rate, is equal to the amount of cash the bank is giving you now
outstanding principal equal to the present value of the remaining future loan payments, again evaluated using the loan interest rate
interest rates are determined by market forces based on the relative supply and demand of funds
nominal interest rates interest rates quoted by banks and other financial institutions that indicate the rate at which money will grow if invested for a certain period of time
inflation measures how the purchasing power of a given amount of currency declines due to increasing prices
real interest rate the rate of growth of your purchasing power, after adjusting for inflation
real interest rate is approximately equal to the nominal interest rate less the rate of inflation
term structure relationship between the investment term and the interest rate
yield curve the plotting of the term structure
risk free interest rate interest rate at which money can be borrowed or lent without risk over a given period

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