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Question;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?

 

Paper#44972 | Written in 18-Jul-2015

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