Exam 5: The Cost of Money Interest Rates

Which of the following statements is true?

Open market operations are operations in which:

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

The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.

Assume that the expected rates of inflation over the next 5 years are 4 percent, 7 percent, 10 percent, 8 percent, and 6 percent, respectively. What is the average expected inflation rate over this 5-year period?

Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% in each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1% × (t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?

The Federal Reserve purchases U.S. Treasury securities to:

Which of the following is the yield of a bond that offers a risk-free rate of 4% and a risk premium of 2%?

As a country increases its borrowing to finance its foreign trade deficit, interest rates are driven up.

Deficit trade balance hinders the Federal Reserve's ability to combat a recession by lowering interest rates.

In general, when rates in the financial markets increase, the prices (values) of financial assets decrease.

Securities that can be easily converted to cash in the market will have a low:

The value of an asset is determined by discounting the future cash flows generated by the asset using the:

Which of the following statements is correct?

Which of the following indicates that the cost of money will increase?

Your uncle would like to restrict his interest rate risk and his default risk, but he would still like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle's criteria?

Firms with the most profitable investment opportunities are willing and able to pay the most for capital, so they tend to attract it away from less efficient firms or from those whose products are not in demand.

If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?

The value of an asset is the future value of the future cash flows that the asset is expected to generate during its life.

Assume that real risk-free rate (r*) = 1.0%; the maturity risk premium is found as MRP = 0.2% × (t - 1) where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07% × (t - 1); the liquidity premium is 0.50% for AT&T bonds but zero for Treasury bonds; and inflation is expected to be 7%, 6%, and 5% during the next three years and then 4% thereafter. What is the difference in interest rates between 10-year AT&T bonds and 10-year Treasury bonds?