Exam 12: Investment and Financial Markets

Suppose you have $400 to invest at a nominal interest rate of 7 percent, and the investment's term to maturity is 1 year. If the inflation rate is 2 percent, then the real return on your investment is approximately

If interest rates increase, the present value of a given payment in the future will

Recall the Application about how the process of securitization in financial markets led to a rise in the rate of home ownership in the U.S. housing market to answer the following question(s). -Recall the Application. Securitization refers to

Explain why high nominal interest rates in an economy does not necessarily mean real interest rates in the same economy are also high.

Assets that are easily convertible into money on short notice are referred to as being

Suppose you have $400 and the inflation rate is 5 percent. In order to earn a real return of $16 on your investment, the nominal interest rate needs to be near

The rate of interest that a bank states as its interest rate is the real rate of interest.

Recall the Application about the number of homeowners in the year 2012 who owed more on their homes than their homes were worth to answer the following question(s). To assist homeowners who are behind on their payments and may eventually lose their homes to foreclosure, many in Congress have advocated for reduction on the amount of money they actually owe-or principal reduction. The hope is that with a reduction in the amount they owed they would start making timely payments on their mortgages and avoid a messy default. -According to this Application, for approximately 12 million homeowners in 2012, the amount owed on mortgages was higher than the actual value of the homes. Homeowners who find themselves in this situation are said to be

Suppose you have $400 and the inflation rate is 4 percent. In order to earn a real return of $20 on your investment, the nominal interest rate must be

Why are some insurance companies interested in programs for nationwide disaster insurance for floods, earthquakes, and hurricanes?

Recall the Application about how the process of securitization in financial markets led to a rise in the rate of home ownership in the U.S. housing market to answer the following question(s). -According to this Application, some households were willing to take on considerable mortgage debt because

The neoclassical theory of investment says both real interest rates and taxes are important determinants of investment.

The opportunity cost of funds is the interest that can be earned by lending the funds.

When individuals or firms make an investment, they incur costs today in the hope of future gains.

If a project costs $800 today and pays a return of $864 next year, what is the highest interest rate at which the project should be undertaken?

If you want to have $50,000 in 5 years, how much would you need to put in your savings account now if the savings account pays 3 percent interest?

If the real interest rate is 4 percent and the inflation rate is 3 percent, then the nominal interest rate is

Both the nominal rate of interest and the real return on investment increase with the inflation rate.

Consider the following five investments. If the nominal interest rate is five percent, which projects should be undertaken? (Note: The Returns are for one period later.)

Investment spending is countercyclical.