SOLUTIONS FOR CORPORATE FINANCE, SIXTH CANADIAN
EDITION, 6TH EDITION BERK (ALL CHAPTERS INCLUDED)
The four most fundamental factors affecting the cost of money are -ANSWER-(1)production
opportunities,
(2)time preferences for consumption,
(3)risk, and
(4)inflation.
production opportunities -ANSWER-The investment opportunities in productive (cash-
generating) assets.
time preferences for consumption -ANSWER-the preferences of consumers for current
consumption as opposed to saving for future consumption
risk -ANSWER-in a financial market context, the chance that an investment will provide a low
or negative return
inflation -ANSWER-the amount by which prices increase over time`
interest rate paid to savers depends -ANSWER-(1)on the rate of return that producers expect
to earn on invested capital,
(2)on savers' time preferences for current versus future consumption,
(3)on the riskiness of the loan, and
(4)on the expected future rate of inflation.
Borrowers bid for the available supply of debt capital using interest rates: -ANSWER-the
firms with the most profitable investment opportunities are willing and able to pay the most
for capital, so they tend to attract it away from inefficient firms and firms whose products
,are not in demand. At the same time, government policy can also influence the allocation of
capital and the level of interest rates.
most capital in the United States is allocated through the price system -ANSWER-where the
interest rate is the price.
supply and demand interact to determine -ANSWER-interest rates in two capital markets
supply curve -ANSWER-A curve that shows the relationship between the price of a product
and the quantity of the product supplied.
upward sloping: indicates that investors are willing to supply more capital the higher the
interest rate they receive on their capital
downward-sloping: demand curve indicates that borrowers will borrow more if interest rates
are lower.
interest rate in each market is the point -ANSWER-where the supply and demand curves
intersect.
risk premium -ANSWER-an expected return in excess of that on risk-free securities
Interest Rates as a Function of Supply and Demand for Funds -ANSWER-
low-risk securities -ANSWER-
flight to quality -ANSWER-An increase in the demand for low-risk government bonds,
coupled with a decrease in the demand for virtually every risky investment.
capital markets -ANSWER-markets that exist where businesses are able to finance operations
as well as large purchases over long periods of time
, Within each category, there are regional markets as well as different types of submarkets.
There is a price for each type of capital -ANSWER-these prices change over time as supply
and demand conditions change.
short-term interest rates -ANSWER-are the interest rates on financial assets that mature
within less than a year
especially volatile, rising rapidly during booms and falling equally rapidly during recessions
long-term interest rates -ANSWER-are interest rates on financial assets that mature a
number of years in the future
When the economy is expanding, firms need -ANSWER-capital, and this demand pushes
rates up
Inflationary pressures -ANSWER-Demand and supply-side pressures that can cause a rise in
the general price level. Demand-pull inflationary pressure is greatest when actual GDP
exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can
arise from increases in unit wage costs, rising import prices and an increase in the prices of
raw materials, fuel and components used in production
strongest during business booms, also exerting upward pressure on rates.
recessions -ANSWER-Slack business reduces the demand for credit, inflation falls, and the
Federal Reserve increases the supply of funds to help stimulate the economy. The result is a
decline in interest rates.
relationship between inflation and long-term interest rates -ANSWER-follows close
correlation
EDITION, 6TH EDITION BERK (ALL CHAPTERS INCLUDED)
The four most fundamental factors affecting the cost of money are -ANSWER-(1)production
opportunities,
(2)time preferences for consumption,
(3)risk, and
(4)inflation.
production opportunities -ANSWER-The investment opportunities in productive (cash-
generating) assets.
time preferences for consumption -ANSWER-the preferences of consumers for current
consumption as opposed to saving for future consumption
risk -ANSWER-in a financial market context, the chance that an investment will provide a low
or negative return
inflation -ANSWER-the amount by which prices increase over time`
interest rate paid to savers depends -ANSWER-(1)on the rate of return that producers expect
to earn on invested capital,
(2)on savers' time preferences for current versus future consumption,
(3)on the riskiness of the loan, and
(4)on the expected future rate of inflation.
Borrowers bid for the available supply of debt capital using interest rates: -ANSWER-the
firms with the most profitable investment opportunities are willing and able to pay the most
for capital, so they tend to attract it away from inefficient firms and firms whose products
,are not in demand. At the same time, government policy can also influence the allocation of
capital and the level of interest rates.
most capital in the United States is allocated through the price system -ANSWER-where the
interest rate is the price.
supply and demand interact to determine -ANSWER-interest rates in two capital markets
supply curve -ANSWER-A curve that shows the relationship between the price of a product
and the quantity of the product supplied.
upward sloping: indicates that investors are willing to supply more capital the higher the
interest rate they receive on their capital
downward-sloping: demand curve indicates that borrowers will borrow more if interest rates
are lower.
interest rate in each market is the point -ANSWER-where the supply and demand curves
intersect.
risk premium -ANSWER-an expected return in excess of that on risk-free securities
Interest Rates as a Function of Supply and Demand for Funds -ANSWER-
low-risk securities -ANSWER-
flight to quality -ANSWER-An increase in the demand for low-risk government bonds,
coupled with a decrease in the demand for virtually every risky investment.
capital markets -ANSWER-markets that exist where businesses are able to finance operations
as well as large purchases over long periods of time
, Within each category, there are regional markets as well as different types of submarkets.
There is a price for each type of capital -ANSWER-these prices change over time as supply
and demand conditions change.
short-term interest rates -ANSWER-are the interest rates on financial assets that mature
within less than a year
especially volatile, rising rapidly during booms and falling equally rapidly during recessions
long-term interest rates -ANSWER-are interest rates on financial assets that mature a
number of years in the future
When the economy is expanding, firms need -ANSWER-capital, and this demand pushes
rates up
Inflationary pressures -ANSWER-Demand and supply-side pressures that can cause a rise in
the general price level. Demand-pull inflationary pressure is greatest when actual GDP
exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can
arise from increases in unit wage costs, rising import prices and an increase in the prices of
raw materials, fuel and components used in production
strongest during business booms, also exerting upward pressure on rates.
recessions -ANSWER-Slack business reduces the demand for credit, inflation falls, and the
Federal Reserve increases the supply of funds to help stimulate the economy. The result is a
decline in interest rates.
relationship between inflation and long-term interest rates -ANSWER-follows close
correlation
