1.) A higher market interest rate: A) increases the future value of current mone

Question

1.) A higher market interest rate:

A) increases the future value of current money.                          

B) increases the present value of future money.

C) maintains the same present value of future money.               

D) decreases the future value of future money.

2.) If a lender is certain that market interest rates will fall in the near future, which of the following will she be most

    likely to purchase?

A) A six-month Treasury bill currently yielding 1.45%

B) A five-year Treasury note currently yielding 2.25%

C) A twenty-year Treasury bond currently yielding 3.65%

D) A twenty-year AAA rated corporate bond currently yielding 3.65%

3.) Which of the following could be expected to cause the equilibrium interest rate to rise?

A) a decrease in government deficits.                                              B) a decrease in the corporate tax on profits.

C) a decrease in subsidies for corporate investment.                    D) a decrease in expected inflation.

4.) If asset one is a AAA rated U.S. Treasury bond yielding 3.5% and asset two is a BBB rated corporate bond with the

      same time to maturity as asset one and is yielding of 6.5%, individual investors would

A) prefer asset one.

B) prefer asset two.

C) be indifferent between the two assets.

D) require more information before choosing asset one or asset two.

5.) Interest rates typically follow a __________ pattern relative to economic activity and the default premium

      typically follows a ___________ pattern relative to economic activity.

A) procyclical; procyclical                                                                B) procyclical; countercyclical

C) countercyclical; procyclical                                                         D) countercyclical; countercyclical

6.) If there is an excess demand for money

A) individuals sell bonds, causing the interest rate to rise.          B) individuals sell bonds, causing the interest rate to fall.

C) individuals buy bonds, causing interest rates to fall.               D) individuals buy bonds, causing interest rates to rise.

7.) According to the preferred habitat theory of the term structure, a slightly upward sloping yield curve indicates that short-

       term interest rates are expected to

A) rise slightly in the future.                                                             B) remain unchanged in the future.

C) decline moderately in the future.                                                 D) decline sharply in the future.

8.) If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent,

      and 5 percent, the preferred habitat theory predicts that the bond with the highest interest rate today is the one

      with a maturity of

A) one year.          B) two years.        C) four years.       D) five years.    E) unable to be determined with the information given

Explanation / Answer

Ans 1)

HIgher interest rate increases the future value of current money hence option A is correct response

Ans 2)

Option A is correct answer for 6 month treasury bill

Ans 4)

Investors require more information to decide between both the assets hence option D is correct response

Ans 5)

Both will follow countercyclical hence option D is correct

Ans 6)

Individual sell bonds causing interest rate to fall

Ans 7)

Option C is correct answer

Ans 8)

unable to be determined with the information given

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