FIN435 Chp 2 Class Activity

Which of the following best defines an interest rate?

• The reward for saving and the cost of borrowing

• The amount of tax on investment income

• The price of goods in the credit market

• The percentage of inflation in the economy

According to the Fisher Effect, the nominal interest rate equals:

• Real interest rate − Expected inflation rate

• Real interest rate + Expected inflation rate

• Real interest rate × Expected inflation rate

• Expected inflation rate − Real interest rate

When investors expect higher inflation, what happens to nominal interest rates?

• They fall

• They remain unchanged

• They rise

• They become negative

The liquidity risk of a financial asset refers to:

• The probability of the issuer defaulting on payment

• The ability to convert the asset into cash quickly without loss

• The time left to maturity

• The expected return on equity

Which yield curve typically signals an upcoming economic slowdown?

• Upward sloping

• Flat

• Downward sloping (inverted)

• Steep upward sloping

Explain in your own words the difference between nominal and real interest rates.

State two key determinants of interest rates in Malaysia and briefly explain how each affects the rate.

What is the Overnight Policy Rate (OPR), and how does it affect the Base Rate (BR) of commercial banks?

Differentiate between default risk and liquidity risk in determining interest rates.

Briefly describe the meaning of a flat yield curve and what it suggests about market expectations.