fiannce and data bank
5.2 The Determinants of Interest Rates
3)
Which of the following statements is false?
A)
The yield curve changes over time.
B)
The formulas for computing present values of annuities and perpetuities cannot be used in situations in which cash flows need to be discounted at different rates.
C)
We can use the term structure to compute the present and future values of a riskfree cash flow over different investment horizons.
D)
The yield curve tends to be inverted as the economy comes out of a recession.
Skill: Conceptual
6)
Which of the following formulas is incorrect?
A)
i =  1
B)
1 + rr =
C)
rr ? i  r
D)
rr=
7)
If the current inflation rate is 5%, then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:
A)
13.0%
B)
13.4%
C)
4.9%
D)
3.0%
Answer:
B
8)
If the current inflation rate is 4% and you have an investment opportunity that pays 10%, then the real rate of interest on your investment is closest to:
A)
10.0%
B)
14.0%
C)
6.0%
D)
5.8%
Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term 
1 year 
2 years 
3 years 
5 years 
10 years 
20 years 
Rate (EAR%) 
5.00% 
4.80% 
4.60% 
4.50% 
4.25% 
4.15% 
9)
What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
A)
Inverted; Higher
B)
Normal; Higher
C)
Inverted; Lower
D)
Normal; Lower
11)
Consider an investment that pays $1000 certain at the end of each of the next four years. If the investment costs $3,500 and has an NPV of $74.26, then the four year riskfree interest rate is closest to:
A)
4.5%
B)
4.58%
C)
4.55%
D)
4.53%
Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term 
1 year 
2 years 
3 years 
5 years 
10 years 
20 years 
Rate (EAR%) 
5.00% 
4.80% 
4.60% 
4.50% 
4.25% 
4.15% 
14)
After examining the yield curve, what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?
.
15)
What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one, three, and five years ?
5.3 Risk and Taxes
2)
Which of the following statements is false?
A)
The equivalent aftertax interest rate is r  (? × r).
B)
Interest rates vary based on the identity of the borrower.
C)
The ability to deduct the interest expense increases the effective aftertax interest rate paid on the loan.
D)
For loans to borrowers other than the U.S. Treasury, the stated interest rate is the maximum amount that investors will receive.
3)
Which of the following statements is false?
A)
U.S. Treasury securities are widely regarded to be riskfree because there is virtually no chance the government will default on these bonds.
B)
In general, if the interest rate is r and the tax rate is ?, then for each $1 invested you will earn interest equal to r and owe taxes of ? × r on the interest.
C)
Investors may receive less than the stated interest rate if the borrowing company has financial difficulties and is unable to fully repay the loan.
D)
Taxes reduce the amount of interest the investor can keep, and we refer to this reduced amount as the tax effective interest rate.
5)
Assume that you presently have a monthly home mortgage with a stated interest rate of 7% APR. If your income tax rate is 20%, then the after tax EAR for your home mortgage is closest to:
A)
5.6%
B)
7.2%
C)
5.8%
D)
7.0%
Use the table for the question(s) below.
Suppose you have the following Loans / Investments
Credit Card 
14.90% APR (Monthly Compounding) 
Automobile Loan 
5.90% APR (Monthly Compounding) 
Home Equity Loan 
8.25% APR (Monthly Compounding) 
Money Market Fund 
5.10% EAR 
6)
If your income tax rate is 30%, then the aftertax EAR for your home equity loan is closest to:
A)
6.0%
B)
5.9%
C)
8.6%
D)
5.8%
7)
If your income tax rate is 30%, then the aftertax return you receive on your money market fund is closest to:
A)
3.7%
B)
5.1%
C)
3.6%
D)
4.2%
8)
What is the effective aftertax rate of each instrument, expressed as an EAR?

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