WorksheetsFIN435 Chp 2 Class Activity
Total questions: 15
Worksheet time: 45mins
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.
Calculate the simple interest earned on a principal of RM12,000 for 4 years at an annual rate of 5%.
Compute the total repayment amount for a RM5,000 loan at a 6% simple annual interest rate over 2 years.
Convert a nominal interest rate of 9% and an inflation rate of 4% into the real interest rate.
A zero-coupon bond has a face value of RM1,000 and sells for RM750, maturing in 5 years. Calculate its approximate YTM.
Bank Negara Malaysia sets the Overnight Policy Rate (OPR) at 3.00%. Bank ABC determines its Base Rate (BR) as follows:
• Cost of funds: 2.50%
• Statutory Reserve Requirement (SRR) cost: 0.25%
• Liquidity and risk premium: 0.20%
• Operating cost and profit margin: 0.30%
• Bank ABC offers a housing loan to a customer at a spread of 1.20% above its BR.
Required:
a) Calculate the Base Rate (BR) for Bank ABC.
b) Determine the effective lending rate (ELR) offered to the customer.
c) Explain briefly how a future increase in the OPR would affect the customer’s effective lending rate.
a) Calculate the Base Rate (BR) for Bank ABC.
b) Determine the effective lending rate (ELR) offered to the customer.
c) Explain briefly how a future increase in the OPR would affect the customer’s effective lending rate.
