Problem 1: What are the effective annualized rates for each of the following annual stated rates and compounding frequencies? What can you conclude about the degree to which stated rates differ from effective rates given (1) the level of interest rates and (2) the frequency of compounding? That is, since stated rates under-estimate the effective cost of borrowing (and are thus misleading) are stated rates more or less misleading when the interest rates are high? Are they more of less misleading as the frequency increases? Compounding Frequency (per year) 2 Effective Annual Rate Stated Annual Rate .01 .01 12 .10 .10 12 .30 .30 2 12

Problem 1: What are the effective annualized rates for each of the following annual stated rates and compounding frequencies? What can you conclude about the degree to which stated rates differ from effective rates given (1) the level of interest rates and (2) the frequency of compounding? That is, since stated rates under-estimate the effective cost of borrowing (and are thus misleading) are stated rates more or less misleading when the interest rates are high? Are they more of less misleading as the frequency increases? Compounding Frequency (per year) 2 Effective Annual Rate Stated Annual Rate .01 .01 12 .10 .10 12 .30 .30 2 12

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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What is meant by the real risk-free rate of interest? Seleccione una: a. The nominal risk-free interest rate, less the expected inflation. b. The rate actually used in the market, not in textbooks. c. The rate quoted on short-term Treasury bills. d. The opportunity cost of foregoing consumption, representing the rate that must be offered to individuals to persuade them to save rather than consume.
Question: It is argued that interest rate should be allowed to an extend of inflation rate so that lender purchasing power may not go down.answer this argument
Which of the following statements is true?a. When the interest rate increases, the present value of asingle amount decreases.b. When the number of interest periods increases, thepresent value of a single amount increases.c. When the interest rate increases, the present value of anannuity increases.d. None of the above are true.
Banks use gap analysis to measure interest rate risk in their balance sheets. If firm XYZ is said to have a positive gap, this means: Group of answer choices C. Rate-sensitive assets exceed rate-sensitive liabilities B. Long-term assets are funded with short-term liabilities D. Rate-sensitive assets equal rate-sensitive liabilities A. Liabilities reprice before assets
Q.Which of the following is not true about maturity matching current asset financing? Select one: a. Temporary current assets will be financed using short term debt. b. It is easy to match equipment maturities with the maturity of debt instruments. c. The use of equity is difficult to classify as equity lacks a maturity date. d. Fixed assets and the permanent level of current assets are financed with long-term debt of varying maturities. e. All of the above are true about current asset financing.
How is duration related to the interest elasticity of a fixed income security? What is the relationship between duration and the price of the fixed-income security? ( LG 22-3 )
A change in money demand or a shift in the money demand curve is caused by a change in * the interest rate. non-interest determinants. cost of borrowing. all of the above
What-if forecasting provides information regarding how much net interest income changes when interest rates are assumed to increase/decrease by various amounts. Select one: True False
An increase in interest rates would mostly harm the ___. 1. creditors 2. debtors 3. lenders 4. providers of funds
Which of the following is FALSE regarding ARM loans? ○ Lenders only originate ARMs if the expected benefit from shifting interest rate risk is greater than the increased risk of borrower default caused by adjusting composite rates none of the answer choices is FALSE ARMs with shorter term index means increased risk to borrower because shorter term index rates have more volatility ARMs with more frequent adjustments to the composite rate are more risky to lenders than ARMs with less frequent adjustments
Contraction risk is the risk that loan principal will be repaid more rapidly than expected, typically when interest rates have increased. Select one: True False
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This is the rate for a short-term riskless security when inflation is expected to be zero. It is calculated by adding the inflation premium to r*. This is the premium added as a compensation for the risk that an investor will not get paid in full. It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate. Component Liquidity risk premium Maturity risk premium Inflation premium…

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