CFIN EXAM 2 || with 100% Accurate Solutions.

The "nominal rate of interest" is defined as the sum if the nominal risk-free rate of return and the expected inflation rate. T/F correct answers F If the federal reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase probably will be greater than the increase in rates in the long-term market. T/F correct answers T The term structure is defined as the relationship between interest rates and the similar securities. T/F correct answers T During or near peaks of business activity , yield curves that are flat or downward sloping (possibly with humps) often are prevalent. T/F correct answers T The "expectation theory" postulates that the "term structure" of interest rates is based on expectations regarding future inflation rates. T/F correct answers T The real rate of interest is composed of a risk free rate of interest plus a premium that reflects the riskiness of the security. T/F correct answers F The yield curve is downward sloping, or inverted, if the long term rates are high than the short-term rates. correct answers F The liquidity preference theory states that each borrower and lender has a preferred maturity and that the slope of the yield curve depends on supply and demand for funds in the long-term market relative to the short-term market. T/F correct answers F, That is the Market Segmentation Theory 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 a long-term rather than short-term debt. T/F correct answers T The two reasons most expert give for the existence of positive maturity risk premium are: 1. because investors are assumed to be risk averse, and 2. because investors prefer to lend long while firms prefer to borrow short. correct answers F Suppose financial institutions, such as savings and loans, were required by law to make a long-term, fixed interest rate mortgages, but at the same time, were largely restricted, in terms of their capital source, to deposit that could be withdrawn on demand. Under these conditions, these financial institutions should prefer a "normal" yield curve to an inverted curve. T/F correct answers T investors with a higher time preference for consumption will demand a "lower rate" of return to forego current consumption and save than investors with a lower time preference for consumption. T/F correct answers F