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##### Chapter 02 Determinants of Interest Rates

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solution

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Question;35. A bank manager lends a corporate client $1,000,000;for six months. The bank charges a $1,000 fee to set up the loan. The corporate;borrower repays $1,050,000 in six months. What is the effective annual rate on;the loan?;A. 5%;B. 5.1%;C. 10.25%;D. 10.47%;E. none of the above;36. You want to have $5 million when you retire in 40;years. You believe you can earn 9% per year on your investment. How much must;you invest each year to achieve your goal when you retire? (Ignore all;taxes);A. $10,412;B. $11,619;C. $14,798;D. $15,295;E. none of the above;37. An investor wants to be able to buy 4% more goods;and services in the future in order to induce her to invest today. During the;investment period prices are expected to rise by 2%. Which statement(s) below;is/are true?;I. 4% is the desired real rate of interest;II. 6% is the approximate nominal rate of interest required;III. 2% is the expected inflation rate over the period;A. I only;B. II only;C. III only;D. I and II only;E. I, II, and III are true;38. Classify each of the following in terms of their;effect on interest rates (increase or decrease);I. Perceived risk of financial securities increases;II. Near term spending needs decrease;III. Future profitability of real investments increases;A. I increases, II increases, III increases;B. I increases, II decreases, III decreases;C. I decreases, II increases, III increases;D. I decreases, II decreases, III decreases;E. none of the above;39. Classify each of the following in terms of their;effect on interest rates (increase or decrease);I. Covenants on borrowing become more restrictive;II. The Federal Reserve increases the money supply;III. Total household wealth increases;A. I increases, II increases, III increases;B. I increases, II decreases, III decreases;C. I decreases, II increases, III increases;D. I decreases, II decreases, III decreases;E. none of the above;40. Inflation causes the demand curve for loanable;funds to shift to the _____ and causes the supply curve to shift to the;A. right, right;B. right, left;C. left, left;D. left, right;41. An individual actually earned a 4% nominal return;last year. Prices went up by 3% over the year. Given that the investment income;was subject to a federal tax rate of 28% and a state and local tax rate of 6%;what was the investor's actual real after-tax rate of return?;A. -0.36%;B. 0.66%;C. 0.72%;D. 1.45%;E. 2.64%;42. A 15 payment annual annuity has its first payment;in 9 years. If the payment amount is $1400 and the interest rate is 7%, what is;the most you should be willing to pay today for this investment?;A. $5,825.11;B. $12,751.08;C. $6,416.67;D. $7,421.24;E. $6,935.74

Paper#55104 | Written in 18-Jul-2015

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