Question 1

If the nominal interest rate is 8% and the risk-free rate is 3%, the expected inflation rate must be:
A) 3%
B) 5%
C) 11%
D) 13%

Accepted Answer

The expected inflation rate can be calculated as the difference between the nominal interest rate and the risk-free rate. Therefore, the expected inflation rate is 8% - 3% = 5%. Option B) is the correct answer.

Question 2

If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace on short term treasury securities?
A) 8%
B) 7%
C) 6%
D) 5%

Accepted Answer

The interest rate observed in the marketplace can be calculated by adding the real interest rate, the inflation premium, and the default risk premium together: 4% (real interest rate) + 2% (inflation premium) + 1% (default risk premium) = 7%. However, since Treasury securities are considered default-risk-free, the default risk premium is not applicable in this case, making the correct calculation: 4% (real interest rate) + 2% (inflation premium) = 6%.

Question 3

An increase in the supply for loanable funds accompanied by an increase in demand will cause interest rates to:
A) increase
B) decrease
C) stay the same
D) not enough information to tell

Accepted Answer

The outcome on interest rates from an increase in both supply and demand for loanable funds is uncertain without knowing the relative magnitudes of the changes in supply and demand.

Question 4

Compensation for those financial debt instruments that cannot be easily converted to cash at prices close to estimated fair market values is termed:
A) liquidity premium
B) market risk premium
C) maturity premium
D) environmental premium

Accepted Answer

Liquidity premium is the additional return demanded by investors for investing in less liquid securities. This compensates for the risk of not being able to easily sell or convert the assets into cash at fair market value.

Question 5

___________________ states that interest rates are a function of the supply and demand for loanable funds.
A) The expectations theory
B) The market segmentation theory
C) The liquidity preference theory
D) The loanable funds theory

Accepted Answer

The loanable funds theory states that interest rates are determined by the supply and demand for loanable funds, such as savings and investments. This theory suggests that if there is high demand for loanable funds, then interest rates will increase, and if there is a surplus of loanable funds, then interest rates will decrease.

Question 6

As interest rates fall, the prices of existing bonds will:
A) rise
B) stay the same
C) fall
D) either a or b, depending on the state of the economy

Accepted Answer

As interest rates fall, it becomes easier for borrowers to obtain funds. This increased demand for money causes the price of existing bonds to rise in order to attract investors. Therefore, the best choice is A) rise.

Question 7

Which of the following factors does not directly impact the level of interest rates?
A) risk
B) marketability
C) maturity
D) cost of producing and distributing new currency

Accepted Answer

The cost of producing and distributing new currency does not directly impact the level of interest rates. Interest rates are influenced mainly by factors such as supply and demand, inflation, and the creditworthiness of the borrower.

Question 8

If the nominal rate of interest is 11%, the risk-free rate of interest is 2%, the default premium is 4%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then the inflation premium must be ______.
A) 2.0%
B) 2.5%
C) 3.0%
D) 3.5%

Accepted Answer

The nominal rate of interest is the sum of the risk-free rate, default premium, liquidity premium, maturity premium, and inflation premium. Therefore, 11% = 2% + 4% + 0.5% + 1.5% + inflation premium. Solving for the inflation premium gives 3%.

Question 9

If the nominal rate of interest is 10%, the real rate of interest is 3%, the default premium is 3%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then the inflation premium must be ______.
A) 2.0%
B) 2.5%
C) 3.0%
D) 1.5%

Accepted Answer

The inflation premium is the difference between the nominal rate of interest and the real rate of interest. In this case, the nominal rate of interest is 10% and the real rate of interest is 3%, so the inflation premium is 10% - 3% = 7%.

Question 10

There are several problems that are unique to family businesses or ventures. Which of the following is not one of those problems?
A) Issues of succession
B) Problems of control, fairness, and equity
C) Issues of credibility
D) Family dynamics

Accepted Answer

The answer of There are several problems that are unique...

Question 11

An increase in the supply for loanable funds accompanied by a decrease in demand will cause interest rates to:
A) increase 
B) decrease
C) stay the same
D) not enough information to tell

Accepted Answer

An increase in the supply of loanable funds means that there are more funds available to be loaned out, which could lead to a decrease in interest rates. However, if demand for those funds decreases at the same time, it could cause an even larger decrease in interest rates. Therefore, the most likely effect of an increase in supply and decrease in demand is a decrease in interest rates.

Question 12

The loanable funds theory used to explain the level of interest rates holds that interest rates are a function of the supply of:
A) loanable funds and the demand for money
B) loanable funds and the demand for loanable funds
C) money and the demand for loanable funds
D) money and the demand for money

Accepted Answer

The loanable funds theory states that interest rates are determined by the supply of and demand for loanable funds, which includes savings and investments. Therefore, option B – loanable funds and the demand for loanable funds – is the correct answer. Option A is incorrect because it includes the demand for money, which is not directly related to the loanable funds market. Option C is incorrect because the supply of money is not directly related to the loanable funds market. Option D is incorrect because it only includes money and demand for money, which is not directly related to the loanable funds market.

Question 13

Which of the following factors does not affect the supply of loanable funds?
A) the volume of savings
B) expansion of deposits by banks
C) attitudes about liquidity
D) quantity of unissued Treasury bonds

Accepted Answer

The unissued Treasury bonds do not affect the supply of loanable funds, as the supply of funds depends on the willingness of savers to lend money and the ability of financial institutions to lend it out. The volume of savings (A), expansion of deposits by banks (B), and attitudes about liquidity (C) are all factors that can affect the supply of loanable funds.

Question 14

The major factor that determines the volume of savings, corporate as well as individual, is the:
A) volume of spending
B) level of national income
C) amount of private pension plans
D) amount of life insurance policies

Accepted Answer

The level of national income is the major factor that determines the volume of savings, as individuals and corporations tend to save a higher percentage of their income when their income is higher. The other options (spending, private pension plans, and life insurance policies) may play a role in individual or corporate savings decisions, but they are not the primary factor determining the overall volume of savings.

Question 15

As interest rates rise, the prices of existing bonds will:
A) rise
B) stay the same
C) fall
D) either a or b, depending on the state of the economy

Accepted Answer

When interest rates rise, the prices of existing bonds will fall because newer bonds will offer higher interest rates, making existing bonds less attractive. As a result, bondholders may sell existing bonds at a lower price to purchase newer bonds offering higher interest rates. This downward pressure on bond prices will continue until the yields on existing bonds match or exceed those of newer bonds.

Question 16

A decrease in the supply for loanable funds accompanied by an increase in demand will cause interest rates to:
A) increase
B) decrease
C) stay the same
D) not enough information to tell

Accepted Answer

With a decrease in the supply of loanable funds and an increase in demand, the demand for funds will exceed the available supply. This leads to lenders increasing the interest rates they charge in order to allocate the limited funds available to the most creditworthy borrowers. Therefore, interest rates will increase.

Question 17

If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace under the simplest form of market interest rates? 
A) 1%
B) 2%
C) 5%
D) 7%

Accepted Answer

The simplest form of market interest rates can be calculated by adding the real interest rate, the inflation premium, and the default risk premium together. In this case, 4% (real interest rate) + 2% (inflation premium) + 1% (default risk premium) = 7%.

Question 18

The risk-free interest rate is composed of:
A) an inflation premium and a default risk premium
B) a default risk premium and a maturity risk premium
C) a real rate of interest and a liquidity premium
D) a real rate of interest and an inflation premium

Accepted Answer

The risk-free interest rate is typically composed of a real rate of interest and an inflation premium. This is because the "risk-free" rate is typically defined as the rate on a Treasury bond, which is considered to have no default risk. However, the rate on the Treasury bond will still have inflation expectations factored in, and thus the need for an inflation premium.

Question 19

Holding supply constant, a decrease in the demand of loanable funds will result in a (n) ___________ in interest rates.
A) increase
B) decrease
C) increase or decrease
D) undetermined change

Accepted Answer

According to the loanable funds market theory, a decrease in demand for loanable funds (while supply remains constant) leads to excess supply or surplus. To clear the surplus, lenders will lower the interest rates to encourage borrowers to take loans. Therefore, a decrease in demand for loanable funds will result in a decrease in interest rates.

Question 20

Holding demand constant, an increase in the supply of loanable funds will result in a (n) ___________ in interest rates.
A) increase
B) decrease
C) increase or decrease
D) undetermined change

Accepted Answer

According to the law of supply and demand, an increase in supply will lead to a decrease in price (or interest rates in this case) if demand remains constant. Therefore, an increase in the supply of loanable funds will result in a decrease in interest rates.

Quiz 8: Interest Rates

If the nominal interest rate is 8% and the risk-free rate is 3%, the expected inflation rate must be:

If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace on short term treasury securities?

An increase in the supply for loanable funds accompanied by an increase in demand will cause interest rates to:

Compensation for those financial debt instruments that cannot be easily converted to cash at prices close to estimated fair market values is termed:

___________________ states that interest rates are a function of the supply and demand for loanable funds.

As interest rates fall, the prices of existing bonds will:

Which of the following factors does not directly impact the level of interest rates?

If the nominal rate of interest is 11%, the risk-free rate of interest is 2%, the default premium is 4%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then the inflation premium must be ______.

If the nominal rate of interest is 10%, the real rate of interest is 3%, the default premium is 3%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then the inflation premium must be ______.

There are several problems that are unique to family businesses or ventures. Which of the following is not one of those problems?

An increase in the supply for loanable funds accompanied by a decrease in demand will cause interest rates to:

The loanable funds theory used to explain the level of interest rates holds that interest rates are a function of the supply of:

Which of the following factors does not affect the supply of loanable funds?

The major factor that determines the volume of savings, corporate as well as individual, is the:

As interest rates rise, the prices of existing bonds will:

A decrease in the supply for loanable funds accompanied by an increase in demand will cause interest rates to:

If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace under the simplest form of market interest rates?

The risk-free interest rate is composed of:

Holding supply constant, a decrease in the demand of loanable funds will result in a (n) ___________ in interest rates.

Holding demand constant, an increase in the supply of loanable funds will result in a (n) ___________ in interest rates.