Question 1

The highest grade on a corporate bond is

Accepted Answer

AAA is considered the highest rating that a corporate bond can receive. This rating indicates a low risk of default and is issued by major credit rating agencies such as Moody's and Standard & Poor's. Other choices like "Corporate Ace" or "No-Risk-Stellar" do not accurately reflect the common rating system for corporate bonds. "Prime Plus" does not indicate the highest rating and could be any rating above "Prime."

Question 2

What is the most widely followed short-term interest rate?

Accepted Answer

The answer of What is the most widely followed short-term...

Question 3

Assume the current one-year interest rate on a bond is 2%, and the one-year expected rate a year from now is 3%. According to the expectations theory of the term structure of interest rates, the two-year interest rate is

Accepted Answer

According to the expectations theory, the long-term interest rates equal the average of the short-term interest rates expected over the term of the long-term bond. 
Therefore, the expected one-year interest rate in two years will be the average of the current 2% and the one-year expected rate a year from now, which is 3%. 
That is, (2% + 3%) / 2 = 2.5%. So the two-year interest rate is 2.5%.

Question 4

The interest rate on a two-year security will continue to adjust until it is equal to

Accepted Answer

The interest rate on a two-year security adjusts to reflect an average of the current one-year rate and the expected one-year rate for the next year. This is because the two-year rate essentially represents the market's expectation of what the one-year rate will be over the next two years, averaged out.

Question 5

On an unsecured loan, your bank will highly likely charge an interest rate

Accepted Answer

Unsecured loans come with higher interest rates as they represent a greater risk to the lender. Therefore, banks usually charge an interest rate above the prime rate to compensate for the risk.

Question 6

Which of the following types of interest rates change daily?

Accepted Answer

The federal funds rate can change daily because it is influenced by market conditions and the Federal Reserve's monetary policy objectives. It is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight.

Question 7

The rate that the least risky firms pay on bonds that they issue is the

Accepted Answer

Triple-A corporate bond rate is the rate that the least risky firms pay on bonds that they issue. This rate is considered the benchmark for other corporate bonds and is typically lower than rates paid by firms with lower credit ratings. The prime rate is the rate that commercial banks charge their most credit-worthy customers, the commercial paper rate is the rate that corporations pay to issue short-term debt, and the federal funds rate is the rate at which banks lend and borrow from each other overnight.

Question 8

The interest rate paid on government securities that mature in less than a year is the

Accepted Answer

The interest rate paid on government securities that mature in less than a year is the Treasury bill rate. This rate is commonly used as a benchmark for short-term interest rates.

Question 9

Assume the current one-year interest rate on a bond is 4%, and the one-year expected rate a year from now is 8%. According to the expectations theory of the term structure of interest rates, the two-year interest rate is

Accepted Answer

According to the expectations theory of the term structure of interest rates, the long-term interest rates are equal to the geometric average of current and expected short-term interest rates. So, the two-year interest rate can be calculated as the geometric average of the current one-year interest rate (4%) and the one-year expected rate a year from now (8%):

(1 + 4%) x (1 + 8%)^(1/2) - 1 = 5.99%

Therefore, the closest answer is B, which is 6%.

Question 10

Federal funds are

Accepted Answer

Federal funds are interbank loans. These are overnight loans made between banks to ensure they meet the Federal Reserve's reserve requirements.

Question 11

The federal funds rate is a

Accepted Answer

The federal funds rate is a one-day (overnight) rate. It is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.

Question 12

Government securities with terms of more than one year are called

Accepted Answer

Government securities with terms of more than one year are called government bonds. Treasury bills are short-term government securities with terms of one year or less. Federal funds bonds and capital bills are not commonly used terms in the financial industry.

Question 13

Government securities that mature in less than a year are called

Accepted Answer

Government securities that mature in less than a year are called Treasury bills. Federal funds bonds and Federal Reserve bonds are not terms used to describe government securities. While government bonds can have varying maturity dates, they typically refer to securities with a longer maturity of 10 years or more.

Question 14

Assume the one-year interest rate on a bond is 6% and the expected one-year rate a year from now is 9%. According to the expectations theory of the term structure of interest rates, the two-year rate will be

Accepted Answer

According to the expectations theory, the two-year interest rate can be calculated as the average of the one-year rate and the expected one-year rate a year from now. Therefore, the two-year rate would be (6% + 9%) / 2 = 7.5%. Therefore, Choice B is correct.

Question 15

The rate that the Fed controls most closely through its open-market operations is the

Accepted Answer

The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. The Federal Reserve uses open-market operations to target this interest rate and keep it within a certain range, making it the rate they control most closely.

Question 16

The federal funds rate is the interest rate that

Accepted Answer

The federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.

Question 17

The federal funds rate is a

Accepted Answer

The federal funds rate is a 1-day rate that determines the interest rate at which banks lend to each other overnight to meet reserve requirements set by the Federal Reserve.

Question 18

The Fed can influence long-term interest rates by

Accepted Answer

The Fed can influence long-term interest rates by influencing the current one-year rate (A) and affecting people's expectations of future short-term rates (B). By adjusting the federal funds rate and other short-term interest rates, the Fed can influence the expectations of investors and borrowers about the path of future interest rates, which in turn affects long-term rates. Therefore, both A and B are correct. Choice C is not directly related to influencing long-term interest rates.

Question 19

The interest rate that banks are charged when they borrow reserves from other banks is the

Accepted Answer

The federal funds rate is the interest rate that banks are charged when they borrow reserves from other banks overnight. This rate is set by the Federal Reserve and is used as a tool to control the money supply and influence economic activity.

Question 20

Assume the one-year interest rate on a bond is 8% and the expected one-year rate a year from now is 12%. According to the expectations theory of the term structure of interest rates, the two-year rate will be

Accepted Answer

According to the expectations theory, the two-year interest rate can be calculated as the average of the one-year rate and the expected one-year rate next year. Therefore, (8% + 12%) / 2 = 10%.

Quiz 10: Money, the Federal Reserve, and the Interest Rate

The highest grade on a corporate bond is

What is the most widely followed short-term interest rate?

Assume the current one-year interest rate on a bond is 2%, and the one-year expected rate a year from now is 3%. According to the expectations theory of the term structure of interest rates, the two-year interest rate is

The interest rate on a two-year security will continue to adjust until it is equal to

On an unsecured loan, your bank will highly likely charge an interest rate

Which of the following types of interest rates change daily?

The rate that the least risky firms pay on bonds that they issue is the

The interest rate paid on government securities that mature in less than a year is the

Assume the current one-year interest rate on a bond is 4%, and the one-year expected rate a year from now is 8%. According to the expectations theory of the term structure of interest rates, the two-year interest rate is

Federal funds are

The federal funds rate is a

Government securities with terms of more than one year are called

Government securities that mature in less than a year are called

Assume the one-year interest rate on a bond is 6% and the expected one-year rate a year from now is 9%. According to the expectations theory of the term structure of interest rates, the two-year rate will be

The rate that the Fed controls most closely through its open-market operations is the

The federal funds rate is the interest rate that

The federal funds rate is a

The Fed can influence long-term interest rates by

The interest rate that banks are charged when they borrow reserves from other banks is the

Assume the one-year interest rate on a bond is 8% and the expected one-year rate a year from now is 12%. According to the expectations theory of the term structure of interest rates, the two-year rate will be