Exam 5: The Cost of Money Interest Rates

Open market operations occur when _____. 

A normal yield curve that is upward sloping implies that:

When the economy is expanding too quickly and the Federal Reserve (Fed) wants to control future growth in the economy, the Fed will:

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 bonds listed below best satisfies your uncle's criteria?

A federal deficit occurs when _____. 

Inflation leads to an increase in the purchasing power of investors. 

_____ is the tendency of prices to increase over time. 

Which of the following is true of the real risk-free rate of interest?

Securities that can be easily converted into cash on short notice at a price that is close to the original cost generally have a:

Assume that the current yield curve is upward sloping or normal. This implies that:

Which of the following statements describes a liquidity premium?

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. 

Everything else the same, the higher the expected rate of inflation, _____. 

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

The yield on a one-year Treasury bond is 5 percent, and the yield on a two-year Treasury bond is 6 percent. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?

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

A foreign trade deficit occurs when a country's _____. 

Everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven up. 

Assume that the real risk-free rate is 4 percent, and that inflation is expected to be 9 percent in Year 1, 6 percent in Year 2, and 4 percent thereafter. Also, assume that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 12 percent, what is the difference in the maturity risk premiums (MRPs) on the two bonds, i.e., what is MRP5 - MRP2? (Round answer to one decimal place.)

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?