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Question # 00003949 Posted By: smartwriter Updated on: 11/23/2013 08:36 AM Due on: 11/30/2013
Subject Accounting Topic Accounting Tutorials:
Question
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MULTIPLE CHOICE QUESTIONS

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 risk-free 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 risk-free 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 after-tax 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 after-tax 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 risk-free 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 after-tax 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 after-tax 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 after-tax rate of each instrument, expressed as an EAR?


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Tutorials for this Question
  1. Tutorial # 00003730 Posted By: smartwriter Posted on: 11/23/2013 08:36 AM
    Puchased By: 2
    Tutorial Preview
    changes over time. B) The formulas for computing present values ...
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    Solution-00003730.zip (80 KB)

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