Chapter 5 and 6

What is a credit-card loan offered by a Bank?

• Personal saving via indirect finance

• Personal borrowing via indirect finance

• Personal saving via direct finance

• Personal borrowing via direct finance

The relationship between interest rates with differing times to maturity

• Securities

• Yield curve

• Term structure of interest rates

• Risk

Rather than comparing (1+i02)^2 with (1+i01)x(1+i11),it is easier to compare

(1+i02) with (i01+i11)/2. This is called calculating the average interest rate of each investment. What are the assumptions of the analysis?

• No transaction costs and no uncertainty about future interest rates

• There is transaction cost and no uncertainty about future interest rates

• There is transaction cost and there is an uncertainty about future interest rates

• There is no transaction cost and there is an uncertainty about future interest rates

Option A: Buy two-year old bond with the interest rate of 5 percent. Option B: Buy one-year old bond with the interest rate of 4 percent in the first year and 7 percent in the second year. Using the average interest rate calculation, which option should you choose to get more money in the future?

• Option A

• Option B

• Either

• None of the above answer is correct

What is the expectations theory of the term structure?

• In equilibrium, the long-term interest rate on a debt security today equals the average of current and future short-term interest rates.

• In equilibrium, the short-term interest rate on a debt security today equals the average of current and future long-term interest rates.

• In equilibrium, the long-term interest rate on a debt security today does not equal the average of current and future short-term interest rates.

• In equilibrium, the short-term interest rate on a debt security today does not equal the average of current and future long-term interest rates.

What is the difference between the interest rate on a longer-term bond and the average interest rate on shorter-term bonds?

• Risk-free interest rate

• Real interest rate

• Nominal interest rate

• Term premium

What is a nominal interest rate adjusted for expected or actual inflation?

• Prime interest rate

• Annual percentage rate (APR)

• Real interest rate

• Effective interest rate

If the nominal interest rate is 7% and the inflation is 4%, what is the real interest rate?

• 2%

• 3%

• 4%

• 5%

Fischer hypothesis states that an increase in inflation rate, in equilibrium, will cause?

• An increase in nominal interest rates

• A decrease in nominal interest rates

• An increase in real interest rates

• A decrease in real interest rates

25% chance that the inflation rate will be 0%

50% chance that the inflation rate will be 3%

25% chance that the inflation rate will be 6%

What is the expected inflation rate?

• 0%

• 2%

• 3%

• 6%