BAFI3273 W6 Interest rate determination

Leading indicators

• Come during major changes in the business cycle

• Come after major changes in the business cycle

• Come before major changes in the business cycle

• Historical data that confirms past trends.

Example of leading indicators:

• Building approvals

• Inflation rates
• Government debt levels
• Unemployment rates

Lagging indicators:

• reflect changes that have already occured in the business cycle

• predict changes in the business cycle

• follow coincident indicators by about 6 months

• are influenced by external factors

Pure expectation theory:

• Interest rates are solely determined by government policy.
• Interest rates are fixed and do not change over time.
• Future rates are irrelevant to current interest rates.
• Yield curve is directed by Investors' expectation

An increase in the supply of loanable funds result in:

• A decrease in interest rates.
• An increase in the cost of borrowing.
• A decrease in the demand for loans.
• An increase in interest rates.

In the loanable fund market, the supply of loanable funds:

• represents borrowers and is downward sloping

• represents savers and is downward sloping

• represents savers and is upward sloping

• represents borrowers and is upward sloping

What is term structure of interest rates?

• The term structure of interest rates is the relationship between interest rates and the time to maturity of debt securities.
• The term structure of interest rates is the average interest rate across all debt securities.
• The term structure of interest rates refers to the inflation rate over time.
• The term structure of interest rates is the relationship between interest rates and stock prices.

Market segment theory believes that:

• Market segment theory states that all investors have the same risk preferences.
• Market segment theory believes that financial markets are completely efficient.
• Market segment theory believes that financial markets are segmented, leading to different interest rates for different maturities.
• Market segment theory suggests that interest rates are uniform across all maturities.

Which of the following explains the risk structure of interest rates?

• Expectations theory

• Liquidity Premium Theory

• Segmented Markets theory

• Default Risk

The risk structure of interest is:

• The impact of government policies on interest rates.
• The correlation between inflation and interest rates.
• The relationship between risk and interest rates in investments.
• The historical trends of interest rates over the last century.