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Exam (elaborations)

CHAPTER 5 (BODIE, KANE) QUESTIONS WITH CORRECT ANSWERS 2025

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CHAPTER 5 (BODIE, KANE) QUESTIONS WITH CORRECT ANSWERS 2025

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Institution
Business finance
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Uploaded on
November 11, 2024
Number of pages
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Written in
2024/2025
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  • chapter 5 bodie kane questions with correct ans

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CHAPTER 5 (BODIE, KANE) QUESTIONS
WITH CORRECT ANSWERS 2025
realVinterestVrateV-VcorrectVanswer-theVinterestVrateVcorrectedVforVtheVeffectsVofVinflation



nominalVinterestVrateV-VcorrectVanswer-
theVinterestVrateVasVusuallyVreportedVwithoutVaVcorrectionVforVtheVeffectsVofVinflation



CPIV-VcorrectVanswer-
(consumerVpriceVindex)VaVmeasureVofVtheVoverallVcostVofVtheVgoodsVandVservicesVboughtVbyVaVtypicalVcons
umer



InfluencesVInterestVRateV-VcorrectVanswer-1.VTheVsupplyVofVfundsVfromVsavers,VprimarilyVhouseholds.

2.VTheVdemandVforVfundsVfromVbusinessesVtoVbeVusedVtoVfinanceVinvestmentsVinVplant,Vequipment,VandVin
ventoriesV(realVassetsVorVcapitalVformation).

3.VTheVgovernment'sVnetVsupplyVofVorVdemandVforVfundsVasVmodifiedVbyVactionsVofVtheVFederalVReserveVB
ank.



SupplyVcurveVforVinterestVratesV-VcorrectVanswer-
TheVsupplyVcurveVslopesVupVfromVleftVtoVrightVbecauseVtheVhigherVtheVrealVinterestVrate,VtheVgreaterVtheVs
upplyVofVhouseholdVsavings.VTheVassumptionVisVthatVatVhigherVrealVinterestVratesVhouseholdsVwillVchooseVt
oVpostponeVsomeVcurrentVconsumptionVandVsetVasideVorVinvestVmoreVofVtheirVdisposableVincomeVforVfutu
reVuse.



DemandVcurveVforVinterestVratesV-VcorrectVanswer-
TheVdemandVcurveVslopesVdownVfromVleftVtoVrightVbecauseVtheVlowerVtheVrealVinterestVrate,VtheVmoreVbus
inessesVwillVwantVtoVinvestVinVphysicalVcapital.VAssumingVthatVbusinessesVrankVprojectsVbyVtheVexpectedVre
alVreturnVonVinvestedVcapital,VfirmsVwillVundertakeVmoreVprojectsVtheVlowerVtheVrealVinterestVrateVonVtheVf
undsVneededVtoVfinanceVthoseVprojects



RV=VrV+VE(i)V-VcorrectVanswer-
TheVequationVimpliesVthatVifVrealVratesVareVreasonablyVstable,VthenVincreasesVinVnominalVratesVoughtVtoVpr
edictVhigherVinflationVrates.VThisVrelationshipVhasVbeenVdebatedVandVempiricallyVinvestigated.VTheVresultsV
areVmixed;ValthoughVtheVdataVdoVnotVstronglyVsupportVthisVrelation-
Vship,VnominalVinterestVratesVseemVtoVpredictVinflationVasVwellVasValternativeVmethods,VinVpartVbecauseVw

eVareVunableVtoVforecastVinflationVwellVwithVanyVmethod.
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