Chapter 5: Interest Rates & Bond Valuation

The nominal rate of interest does not take into account a risk premium

The market segmentation theory states that borrowers want long term loans, while lenders want to make short-term loans

The cost of borrowing funds is most commonly called the interest rate

A normal yield curve slopes upward to reflect the higher long-term borrowing costs

A farmer recently sold 2 of his chicken farms and farm equipment to reduce his financial risk (sorry guys but this is a very bizarre question!!)

As the market interest rate increases, the price of a bond decreases

The pure expectations theory explains why the yield curve would normally be upward sloping

The cost of borrowing funds is most commonly called the interest rate

If corporate profits increase in the aggregate, interest rates will rise

The real rate of return is the compensation you require delaying consumption

If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will probably be greater than the increase in rates in the long-term market

Long-term interest rates reflect expectations about future inflation. Inflation has varied significantly from year to year during the last 10 years, and, as a result, long-term rates have fluctuated more than short-term rates.

If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt.

During or near peaks of business activity, yield curves that are flat or downward sloping (possible with humps) are often prevalent.

If the liquidity preference theory of the term structure is correct, we would expect the size of the maturity risk premium to increase with maturity. Thus, we might observe an upward sloping yield curve, even if future short-term rates are expected to decrease.

The __________ rate of interest is typically the required rate of return on a 3 month US Treasury Bill

A(n) ________ yield curve would indicate that investors believe interest rates may increase in the future.

The ________ rate of interest has been adjusted for inflation and risk

The possibility that the issuer of debt will not pay the principle is scheduled as

The nominal rate is ________, if r=2%, inflation is 1.5%, the LP is 1.2%, the DRP is 3% and the MRP is 2%.

Historically, what has had the greatest effect on interest rates?

A(n) ______ explains to the borrower different conditions of the loan

Historically, what is the recurrence of a business cycle?

The degree of ________ risk decreases as the amount of debt held by a firm decreases

The ______ is a graphical representation of the term structure of interest rates

If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond?

If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?

According to the Fisher equation, nominal interest rate equals to the real rate plus

Inflation, recession, and high interest rates are economic events which are characterized as

the degree of _____ is how cash flows from operations fluctuate over time