Chapter 6 Interest Rates and Bond Valuation(with Questions Answers)

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 6 Interest Rates and Bond Valuation

6.1 Interest rates and required returns

1) An interest rate or a required rate of return represents the cost of money.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

2) A real rate of interest is the compensation paid by the borrower of funds to the lender
measured in today's dollars.
Answer: FALSE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

3) A nominal rate of interest is approximately equal to the sum of the real rate of interest plus the
risk free rate of interest.
Answer: FALSE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

4) The nominal interest rate on a risk-free investment is approximately equal to the sum of the
real rate of interest plus an inflation premium.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

5) The nominal interest rate on a risky investment equals the risk-free rate plus a risk premium.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking
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,6) The nominal rate of interest on a bond is 8% and the expected inflation premium is 4%. This
results in an approximate real rate of interest of 4% on the bond.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

7) Historically, the rate of return on U.S. Treasury bills is usually greater than the rate of
inflation.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

8) The nominal rate of interest is the actual rate of interest charged by the supplier of funds and
paid by demander.
Answer: TRUE
Diff: 1
Topic: Interest Rate Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

9) The term structure of interest rates is a graphical presentation of the relationship between the
maturity and rate of return.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

10) An inverted yield curve is a downward-sloping yield curve that indicates that short-term
interest rates are generally higher than long-term interest rates.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking



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,11) A yield curve that reflects relatively similar borrowing costs for both short- and long-term
loans is called a normal yield curve.
Answer: FALSE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

12) Upward-sloping yield curves result from higher future inflation expectations, lender
preferences for shorter maturity loans, and greater supply of short-term as opposed to long-term
loans relative to their respective demand.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

13) A flat yield curve means that the rates do not vary much at different maturities.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

14) A normal yield curve is upward-sloping and indicates generally cheaper short-term
borrowing costs than long-term borrowing costs.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

15) A flat yield curve indicates generally cheaper long-term borrowing costs than short-term
borrowing costs.
Answer: FALSE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking




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, 16) The market segmentation theory suggests that the shape of the yield curve is determined by
the supply and demand for funds within each maturity segment.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

17) The liquidity preference theory suggests that the shape of the yield curve is determined by
the supply and demand for funds within each maturity segment.
Answer: FALSE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

18) The liquidity preference theory suggests that short-term interest rates should be lower than
long-term interest rates most of the time.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

19) The expectations theory suggests that the shape of the yield curve reflects investors
expectations about future interest rates.
Answer: TRUE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking

20) A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than
long-term borrowing costs.
Answer: FALSE
Diff: 1
Topic: Term Structure of Interest Rates
Learning Obj.: LG 1
Learning Outcome: F-05
AACSB: Analytical Thinking




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Copyright © 2019 Pearson Education, Inc.