Question 1

A risk-free rate is a return on an investment that is guaranteed for a specified period.

Accepted Answer

The risk-free rate represents the return on an investment with zero risk, indicating a guaranteed return over a specified period, typically associated with government bonds.

Question 2

A risk premium is the amount of interest you might receive over and above the risk-free return insured by the federal government.

Accepted Answer

A risk premium refers to the additional return an investor expects to receive from an investment that carries a higher level of risk compared to a risk-free asset. The risk-free return is typically represented by government bonds, which are considered safe investments. The risk premium compensates investors for taking on the additional risk.

Question 3

Use the following two columns of items to answer the matching questions below:
-risk-free rate
A)an additional return beyond the risk-free rate
B)a return on an investment that is guaranteed for a specified period

Accepted Answer

The answer of Use the following two columns of items...

Question 4

Wanda Clark expects interest rates to decline in the next few months. To maximize her earnings, she should put her savings in a
A) two-year certificate of deposit.
B) six-month certificate of deposit.
C) cashier's check.
D) savings account.

Accepted Answer

A two-year certificate of deposit (CD) locks in the current interest rate for a longer period, which is beneficial if interest rates are expected to decline.

Question 5

The relationship between risk and return
A) is positive.
B) is negative.
C) is inverse.
D) has no correlation.

Accepted Answer

The relationship between risk and return is positive, meaning that typically, investments with higher risk are associated with higher potential returns.

Question 6

Investments with a higher risk of default pay higher rates of interest than those that are less risky.

Accepted Answer

Investments with a higher risk of default typically offer higher rates of interest as compensation for the increased risk that investors take on. This is known as the risk-return tradeoff.

Question 7

When you invest in a CD that has a maturity of one year, you are guaranteed the interest rate offered on that CD. Your return would be
A) a risk premium.
B) money in the bank.
C) a risk-free return.
D) liquid assets.

Accepted Answer

Investing in a Certificate of Deposit (CD) with a fixed interest rate for a specific term, such as one year, provides a guaranteed return on your investment, assuming the bank does not default. This is considered a risk-free return because the interest rate is fixed and guaranteed for the term of the CD.

Question 8

Which of the following is not true regarding certificates of deposit (CDs)?
A) The longer the term, the higher the interest rate paid.
B) All banks offer the same rates on CDs.
C) Early withdrawals of money are subject to a penalty.
D) The investment of large amounts will pay higher interest than lower amounts.

Accepted Answer

Certificates of deposit (CDs) interest rates vary from bank to bank; they do not all offer the same rates. This variability allows consumers to shop around for the best rates.

Question 9

Your commercial bank is offering a one-year CD with an interest rate of 7%. A financial company offers an interest rate of 10% on its one-year certificate (not a CD). The risk premium offered by the financial company is
A) 7%.
B) 3%.
C) 4%.
D) 1.5%.

Accepted Answer

The risk premium is the difference between the interest rates offered by the two entities, which is 10% - 7% = 3%.

Question 10

Juan has $1,000 that he would like to invest in a CD. His bank offers two alternatives, a one-year CD paying 6% or a two-year CD paying 9% per annum. Juan has been reading that interest rates are rising, and, based on his research, he estimates that by year-end the rate on one-year CDs will increase to 10%. What alternative would give Juan the most interest and what would the total interest be?
A) Two one-year CDs returning $120 interest
B) Two one-year CDs returning $160 interest
C) One two-year CD returning $180 interest
D) One two-year CD returning $1,900 interest

Accepted Answer

The two-year CD paying 9% per annum would give Juan the most interest. The total interest earned would be $180.

Question 11

In saving or investing, the ________ the risk, the ________ the potential return.
A) higher; higher
B) lower; lower
C) higher; lower
D) Both A and B are correct.

Accepted Answer

Both statements A and B are correct because in finance, there is a direct relationship between risk and return. Higher risk investments typically offer the potential for higher returns to compensate for the increased risk, while lower risk investments offer lower returns due to their lower risk.

Question 12

The ________ is an additional return beyond the risk-free rate that can be earned from a deposit guaranteed by the government.
A) risk-free rate
B) risk premium
C) specific return
D) nominal return

Accepted Answer

The risk premium is the additional return an investor expects to receive from an investment that carries a certain amount of risk, above what could be earned on a risk-free investment, such as a government-guaranteed bond.

Question 13

It is illegal for a federally insured financial institution to charge those with poor credit records higher interest rates than those with good credit.

Accepted Answer

Financial institutions often charge higher interest rates to individuals with poor credit records to offset the higher risk of default associated with lending to such individuals. This practice is legal and common in the lending industry.

Question 14

The ________ is the return that is guaranteed on an investment for a specified period of time.

Accepted Answer

The answer of The ________ is the return that is...

Question 15

A certificate of deposit guarantees or locks in an interest rate for a specified time and rate.

Accepted Answer

A certificate of deposit (CD) is a type of savings account that holds a fixed amount of money for a fixed period of time, during which the money earns interest at a predetermined, fixed rate.

Question 16

The interest rate is composed of the ________ and the ________.
A) risk-free rate; risk discount
B) risk-free rate; risk premium
C) risk-free rate; default risk premium
D) None of the above

Accepted Answer

The interest rate is composed of the risk-free rate, which is the return on an investment with no risk of financial loss, and the risk premium, which is the extra return investors demand for taking on additional risk.

Question 17

The ________ is the return on an investment that is guaranteed for a specified period.
A) risk-free rate
B) risk premium
C) specific return
D) fair market return

Accepted Answer

The risk-free rate is the return on an investment with no risk of financial loss, typically represented by government bonds, and is guaranteed for a specified period.

Question 18

The one-year loan rate for individuals is usually about the same as the one-year CD rate.

Accepted Answer

The one-year loan rate for individuals is usually higher than the one-year CD rate because banks aim to make a profit by lending at higher rates than they offer on deposits.

Question 19

Certificates of deposit (CDs) with shorter maturity dates tend to pay higher interest rates than those with longer maturity dates.

Accepted Answer

Certificates of deposit (CDs) with longer maturity dates typically pay higher interest rates than those with shorter maturity dates because the longer term represents a greater commitment and therefore usually comes with a higher reward in the form of interest.

Question 20

Jack has $1,000 that he wishes to invest for the next two years. One-year CDs are currently paying 8% while two-year CDs are paying 12% per annum. Economists are predicting that interest rates will rise by the end of the year. What is the minimum interest rates would have to increase to in order for the one-year CD to be better than the two-year CD?
A) 16%
B) 14%
C) 12%
D) 10 %

Accepted Answer

To determine the minimum interest rate increase required for the one-year CD to be a better investment than the two-year CD, we first calculate the total amount Jack would have after two years with each option. For the two-year CD at 12% per annum, the calculation is straightforward: $1,000 * (1 + 0.12)^2 = $1,254.40. For the one-year CD, we know the first year's interest rate is 8%, so the amount after one year is $1,000 * (1 + 0.08) = $1,080. For the one-year CD to be better, the interest rate in the second year (let's call it x) needs to result in a total greater than $1,254.40. The equation for the second year is $1,080 * (1 + x) > $1,254.40. Solving for x gives us x > 16.15%. Therefore, the interest rate would need to increase to more than 16% for the one-year CD to be a better option, making 16% the minimum increase required.

Quiz 5: Banking and Interest Rates

A risk-free rate is a return on an investment that is guaranteed for a specified period.

A risk premium is the amount of interest you might receive over and above the risk-free return insured by the federal government.

Use the following two columns of items to answer the matching questions below: -risk-free rate A)an additional return beyond the risk-free rate B)a return on an investment that is guaranteed for a specified period

Wanda Clark expects interest rates to decline in the next few months. To maximize her earnings, she should put her savings in a

The relationship between risk and return

Investments with a higher risk of default pay higher rates of interest than those that are less risky.

When you invest in a CD that has a maturity of one year, you are guaranteed the interest rate offered on that CD. Your return would be

Which of the following is not true regarding certificates of deposit (CDs) ?

Your commercial bank is offering a one-year CD with an interest rate of 7%. A financial company offers an interest rate of 10% on its one-year certificate (not a CD) . The risk premium offered by the financial company is

In saving or investing, the the risk, the the potential return.

The ________ is an additional return beyond the risk-free rate that can be earned from a deposit guaranteed by the government.

It is illegal for a federally insured financial institution to charge those with poor credit records higher interest rates than those with good credit.

The ________ is the return that is guaranteed on an investment for a specified period of time.

A certificate of deposit guarantees or locks in an interest rate for a specified time and rate.

The interest rate is composed of the and the .

The ________ is the return on an investment that is guaranteed for a specified period.

The one-year loan rate for individuals is usually about the same as the one-year CD rate.

Certificates of deposit (CDs) with shorter maturity dates tend to pay higher interest rates than those with longer maturity dates.