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Understanding Interest Rates
Understanding Interest Rates MCQs
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The more an individual discounts the future
the more he or she prefers to put consumption off to a future date.
the more he or she prefers consuming in the present.
the more he or she prefers to hold discount bonds.
will have no effect on current consumption.
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Interest is
the price of money.
the difference between the amount to be repaid and the amount paid.
the current value of a stream of future payments.
the rate of return of a financial asset
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The present value can be defined algebraically as PVt is present value at time t; FV is future value one year from today; Rt is lending at time t.
$PVt = $FV/(1 - Rt)
$PVt = $FV/(Rt – 1)
$PVt = (1 + Rt)/$FV
$PVt = $FV/(1 + Rt)
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The present value of $8052.55 received in 5 years is
$5000.00
$2952.45
$5096.22
$3154.79
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The longer the term to maturity
the smaller the interest cost of the debt.
the shorter is the duration.
the longer the interest cost of the debt.
the higher the interest rate.
?
The higher the interest rate
The higher the present value
Interest rates have no effect on the present value.
The lower the present value.
The lower the future value (FV).
?
The formula for computing the yield to maturity on a financial instrument is
$PVt = $FV0/(1 + Rt/k)kn
$FVt = $PV0/(1 + Rt/k)kn
$PVt = $FV0/(1 - Rt/k)kn
$FVt = $PV0/(1 - Rt/k)kn
?
The interest cost of a $200 loan that is repaid in three years for which the interest is charged at a rate of 10% per year is
$30
less than $30
more than $30
$40
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The advertisement states that a 6-month financial instrument provides an annual return of 15%. If you invest $1000, at the end of six months you will ...
$1150.00
$1556.25
$1075.00
$1356.25
?
The return to the investor from a STRIP bond comes from
decreases in price.
the interest generated from the investment.
increases in price.
the coupon.
?
A perpetuity bond
has a present value equal to FV/R.
has a coupon that is paid at maturity.
has a future value of 0.
has a fixed coupon that is paid indefinitely.
?
A rise in R will
reduce PV
increase PV
increase C
increase FV
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In general bond prices are
more volatile the longer the term to maturity.
more volatile the shorter the term to maturity.
volatility is independent of the term to maturity.
volatility is dependent of the term to maturity.
?
The internal rate of return
equates the coupon rate of a bond with the market interest rate.
equates the present value of a bond with its price.
equates the initial outlay with the future value of a series of net cash flows.
equates the initial outlay with the present value of future net cash flows.
?
The Fisher equation states that
the nominal interest rate is the real interest rate minus expected inflation.
the nominal interest rate is the real interest rate plus expected inflation.
the nominal interest rate is the real interest rate plus current inflation.
the nominal interest rate is the real interest rate minus expected inflation.
?
The interest rate that matters in borrowing and lending decisions is
the nominal interest rate.
the ex post interest rate.
the ex ante interest rate.
the prime interest rate.
?
Negative nominal interest rate are possible because
the cost of holding money is non zero.
the government wants to encourage borrowing.
all of the above people have lost some faith in private financial institutions.
all of the above
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The ex ante real interest rate after taxes is
R(1 - t) - πe
R(1 + t) + πe
R(1 - t) + πe
R(1 + t) - πe
?
The Consumer price index is
A perfect measure of the rate of inflation.
A measure which underestimates the rate of inflation.
A measure that overstates the rate of inflation inflation.
Can be all be all of the above depending on which country’s CPI is being
?
High real interest rates have been a common occurrence in Canada as well as other countries for a number of years. Which of the following does not exp...
Higher inflationary expectations.
Inflation targeting from the Central banks.
A rise in energy prices.
Deregulation of the financial sector.
