FIN300 CHAPTER 3 Questions with Correct Solutions
Question:
1. Basis point (bps)
Answer:
A unit equal to one one-hundredth of one percent (1.23% is 123 bps).
Question:
2. Binomial model
Answer:
A one-period framework modeling uncertainty through two random states (up and down).
Question:
3. Certificate of deposit (CD)
Answer:
A savings account with a lockup period, providing a riskless nominal rate via federal
insurance.
Question:
4. Consumer Price Index (CPI)
Answer:
An inflation measure tracking average price changes over time for an urban consumer market
basket.
Question:
5. Core measures of inflation
Answer:
Inflation metrics that strip out volatile food and energy components.
Question:
6. Decimal form
Answer:
An interest rate in raw mathematical form without a % symbol (e.g., 12% is 0.12).
Question:
7. Dual mandate
, Answer:
The Federal Reserve's two primary objectives: price stability and maximum sustainable
employment.
Question:
8. Economic bad
Answer:
Something that makes economic agents worse off, all else equal (e.g., crime, pollution).
Question:
9. Excess return
Answer:
A risk premium; the return above the riskless rate demanded to bear uncertainty.
Question:
10. Expected value, payout, or return
Answer:
The probability-weighted average of possible state-contingent outcomes.
Question:
11. Federal funds rate
Answer:
A riskless overnight money market rate banks charge to lend excess cash to each other.
Question:
12. Federal Reserve (Fed)
Answer:
The U.S. central bank responsible for monetary policy and the dual mandate.
Question:
13. Fisher equation
Answer:
The quantitative relationship between nominal interest rates, real interest rates, and
expected inflation.
Question:
14. Future value (FV)
Answer:
A lump sum cash flow occurring later than the present value.
Question:
1. Basis point (bps)
Answer:
A unit equal to one one-hundredth of one percent (1.23% is 123 bps).
Question:
2. Binomial model
Answer:
A one-period framework modeling uncertainty through two random states (up and down).
Question:
3. Certificate of deposit (CD)
Answer:
A savings account with a lockup period, providing a riskless nominal rate via federal
insurance.
Question:
4. Consumer Price Index (CPI)
Answer:
An inflation measure tracking average price changes over time for an urban consumer market
basket.
Question:
5. Core measures of inflation
Answer:
Inflation metrics that strip out volatile food and energy components.
Question:
6. Decimal form
Answer:
An interest rate in raw mathematical form without a % symbol (e.g., 12% is 0.12).
Question:
7. Dual mandate
, Answer:
The Federal Reserve's two primary objectives: price stability and maximum sustainable
employment.
Question:
8. Economic bad
Answer:
Something that makes economic agents worse off, all else equal (e.g., crime, pollution).
Question:
9. Excess return
Answer:
A risk premium; the return above the riskless rate demanded to bear uncertainty.
Question:
10. Expected value, payout, or return
Answer:
The probability-weighted average of possible state-contingent outcomes.
Question:
11. Federal funds rate
Answer:
A riskless overnight money market rate banks charge to lend excess cash to each other.
Question:
12. Federal Reserve (Fed)
Answer:
The U.S. central bank responsible for monetary policy and the dual mandate.
Question:
13. Fisher equation
Answer:
The quantitative relationship between nominal interest rates, real interest rates, and
expected inflation.
Question:
14. Future value (FV)
Answer:
A lump sum cash flow occurring later than the present value.
