6: Determining Market Interest Rates

Multiple Choice Questions

Chapter 6 Determining Market Interest Rates u 13

Chapter 6 Determining Market Interest Rates u 13

Chapter 6 Determining Market Interest Rates u 13

6-1
Answer: a
Difficulty: M
6-2
Answer: c
Difficulty: E
6-3
Answer: a
Difficulty: E
6-4
Answer: b
Difficulty: E
6-5
Answer: b
Difficulty: E
6-6
Answer: a
Difficulty: E
6-7
Answer: d
Difficulty: E
6-8
Answer: c
Difficulty: M
6-9
Answer: a
Difficulty: M
6-10
Answer: c
Difficulty: E
6-11
Answer: c
Difficulty: E
6-12
Answer: b
Difficulty: M
6-13
Answer: b
Difficulty: M
6-14
Answer: d
Difficulty: E
6-15
Answer: b
Difficulty: M
6-16
Answer: c
Difficulty: E
6-17
Answer: c
Difficulty: M
6-18
Answer: d
Difficulty: E
6-19
Answer: d
Difficulty: E
6-20
Answer: d
Difficulty: M
6-21
Answer: b
Difficulty: M
6-22
Answer: c
Difficulty: M
6-23
Answer: b
Difficulty: M
6-24
Answer: b
Difficulty: M
6-25
Answer: b
Difficulty: M
6-26
Answer: a
Difficulty: M
6-27
Answer: a
Difficulty: M
6-28
Answer: b
Difficulty: M
6-29
Answer: b
Difficulty: M
6-30
Answer: c
Difficulty: E
6-31
Answer: c
Difficulty: E
6-32
Answer: c
Difficulty: M
6-33
Answer: d
Difficulty: M
6-34
Answer: a
Difficulty: E
6-35
Answer: b
Difficulty: M
6-36
Answer: c
Difficulty: M
6-37
Answer: c
Difficulty: H
6-38
Answer: b
Difficulty: H
6-39
Answer: a
Difficulty: H
6-40
Answer: c
Difficulty: M
6-41
Answer: b
Difficulty: M
6-42
Answer: c
Difficulty: E
6-43
Answer: d
Difficulty: M
6-44
Answer: c
Difficulty: M
6-45
Answer: b
Difficulty: E
6-46
Answer: a
Difficulty: E
6-47
Answer: d
Difficulty: M
6-48
Answer: b
Difficulty: M
6-49
Answer: c
Difficulty: E
6-50
Answer: b
Difficulty: E
6-51
Answer: b
Difficulty: E
6-52
Answer: a
Difficulty: M
6-53
Answer: a
Difficulty: E
6-54
Answer: a
Difficulty: M
6-55
Answer: b
Difficulty: E
6-56
Answer: a
Difficulty: M
6-57
Answer: a
Difficulty: E
6-58
Answer: b
Difficulty: E
6-59
Answer: d
Difficulty: H
6-60
Answer: a
Difficulty: E
6-61
Answer: c
Difficulty: M
6-62
Answer: b
Difficulty: M
6-63
Answer: c
Difficulty: M
6-64
Answer: b
Difficulty: E
6-65
Answer: a
Difficulty: E
6-66
Answer: a
Difficulty: M
6-67
Answer: b
Difficulty: M
6-68
Answer: d
Difficulty: E
6-69
Answer: c
Difficulty: M
6-70
Answer: b
Difficulty: E
6-71
Answer: b
Difficulty: E
6-72
Answer: b
Difficulty: E
6-73
Answer: c
Difficulty: E
6-74
Answer: b
Difficulty: M
6-75
Answer: a
Difficulty: E
6-76
Answer: c
Difficulty: E
6-77
Answer: b
Difficulty: M
6-78
Answer: c
Difficulty: M
6-79
Answer: b
Difficulty: M / Which economic issue dominated the 2000 election campaign?
a. What to do with the emerging U.S. budget surplus.
b. How to deal with rising unemployment.
c. How to deal with rising inflation.
d. How to deal with the declining value of the dollar.
How is the interest rate that prevails in the bond market determined?
a. By the interaction of stock prices and bond prices.
b. By the decision of the president, in consultation with Congress.
c. By demand for and supply of bonds.
d. By the Board of Governors of the New York Stock Exchange.
In the bond market, the buyer is considered to be
a. the lender.
b. the borrower.
c. the lender or the borrower, depending upon the use to which the funds are put.
d. the lender or the borrower, depending upon whether interest rates are rising or falling.
In the bond market, the seller is considered to be
a. the lender.
b. the borrower.
c. the lender or the borrower, depending upon the use to which the funds are put.
d. the lender or the borrower, depending upon whether interest rates are rising or falling.
In the market for loanable funds, the buyer is considered to be
a. the lender.
b. the borrower.
c. the lender or the borrower, depending upon the use to which the funds are put.
d. the lender or the borrower, depending upon whether interest rates are rising or falling.
In the market for loanable funds, the seller is considered to be
a. the lender.
b. the borrower.
c. the lender or the borrower, depending upon the use to which the funds are put.
d. the lender or the borrower, depending upon whether interest rates are rising or falling.
In the market for loanable funds the price of the funds exchanged is
a. the price of bonds.
b. the volume of bonds purchased.
c. the volume of bonds sold.
d. the interest rate.
The bond demand curve slopes down because
a. interest rates decline as bond prices decline.
b. when bond prices are low inflation is low.
c. the lender is willing and able to purchase more bonds when the price of the bond is low.
d. the borrower is willing and able to purchase more bonds when the price of the bond is low.
The formula for the yield to maturity, i, on a discount bond is i =
  1. (Face value - Discount price)/Discount price.
  2. (Discount price - Face value)/Discount price.
  3. (Face value - Discount price)/Face value.
  4. (Discount price - Face value)/Face value.
A one-year discount bond with a face value of $10,000 that is currently selling for $8000 has an interest rate of
a. 2.5%.
b. 20%.
c. 25%
d. 80%.
A one-year discount bond with a face value of $10,000 that is currently selling for $9000 has an interest rate of
a. 9%.
b. 10%
c. 11.11%
d. 90%.
A one-year discount bond with a face value of $10,000 has an interest rate of 5%. What is its price?
a. $9500
b. $9523.81
c. $9625.25
d. $9800
A one-year discount bond with a face value of $10,000 has an interest rate of 10%. What is its price?
a. $9000
b. $9090.91
c. $9100
d. $9150.25
Loanable funds refers to
a. only those funds loaned from one bank to another.
b. only those funds loaned to banks by the Federal Reserve.
c. only those funds loaned by banks to private individuals.
d. all those funds changing hands between lenders and borrowers in the bond market.
The demand for bonds is
a. equivalent to the demand for loanable funds.
b. equivalent to the supply of loanable funds.
c. represented by an upward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds demanded is on the horizontal axis.
d. represented by a downward-sloping line when the interest rate is on the vertical axis and the quantity of bonds demanded is on the horizontal axis.
The supply curve of loanable funds slope up because
a. at higher bond prices more loanable funds will be supplied.
b. higher interest rates reduce the inflation rate.
c. an increase in the interest rate makes lenders more willing and able to supply more funds.
d. a decrease in the interest rate makes lenders more willing and able to supply more funds.
The bond supply curve
a. shows the quantity of bonds lenders are willing to supply as bond prices change.
b. shows the quantity of bonds lenders are willing to supply as interest rates change.
c. shows the quantity of bonds borrowers are willing to supply as bond prices change.
d. is represented by a downward sloping line when the price of bonds is on the vertical axis and the quantity of bonds supplied is on the vertical axis.
The bond supply curve slopes up because
a. interest rates rise as bond prices rise.
b. when bond prices are high inflation is high.
c. the lender is willing and able to offer more bonds when the price of the bond is low.
d. the borrower is willing and able to offer more bonds when the price of the bond is high.
The demand curve for loanable funds slopes down because.
a. at lower bond prices more loanable funds will be supplied.
b. lower interest rates reduce the inflation rate.
c. an increase in the interest rate makes borrowers more willing and able to demand more funds.
d. a decrease in the interest rate makes borrowers more willing and able to demand more funds.
Which of the following statements is correct?
  1. The supply curve for loanable funds slopes up, whereas the supply curve for bonds slopes down.
  2. The demand curve for loanable funds slopes up, whereas the demand curve for bonds slopes down.
  3. The demand curve for loanable funds and the demand curve for bonds both slope up.
  4. The supply curve for bonds and the supply curve for loanable funds both slope up.
If the equilibrium price in the bond market for a one-year discount bond is $9200, then the equilibrium interest rate in the loanable funds market must be
a. 8%.
b. 8.7%.
c. 9.2%.
d. 10%.
If the equilibrium price in the bond market for a one-year discount bond is $9400, then the equilibrium interest rate in the loanable funds market must be
a. 4%.
b. 6%.
c. 6.4%.
d. 9.4%.
If the equilibrium interest rate in the loanable funds market on a one-year discount bond is 12%, then the equilibrium price in the bond market must be
a. $8800.
b. $8928.57.
c. $9214.36.
d. $10,000.
If the equilibrium interest rate in the loanable funds market on a one-year discount bond is 8%, then the equilibrium price in the bond market must be
a. $9200.
b. $9259.26.
c. $9325.15.
d. $10,000.
If there is an excess supply of loanable funds at a given interest rate, then
a. the price of bonds will fall.
b. the price of bonds will rise.
c. the interest rate will rise.
d. the price of bonds may rise or fall depending upon the reasons for the excess supply of loanable funds.
If there is an excess demand for loanable funds at a given interest rate, then
a. the price of bonds will fall.
b. the price of bonds will rise.
c. the interest rate will fall.
d. the price of bonds may rise or fall depending upon the reasons for the excess demand for loanable funds.
If there is an excess demand for bonds at a given price of bonds, then
  1. the interest rate will fall.
  2. the interest rate will rise.
  3. the price of bonds will fall.
  4. the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.
If there is an excess supply of bonds at a given price of bonds, then
  1. the interest rate will fall.
  2. the interest rate will rise.
  3. the price of bonds will fall.
  4. the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.
Which of the following would NOT cause the demand curve for bonds to shift
a. a change in wealth.
b. a change in the price of bonds.
c. a change in the liquidity of bonds.
d. a change in expected inflation.
As wealth increases in the economy, savers are
a. willing to hold more cash relative to their holdings of bonds.
b. willing to buy fewer bonds at any given price.
c. willing to buy more bonds at any given price.
d. willing to lend less at any given interest rate.
As wealth increases in the economy, savers are
a. willing to hold more cash relative to their holdings of bonds.
b. willing to buy fewer bonds at any given price.
c. willing to lend more at any given interest rate.
d. willing to lend less at any given interest rate.
As wealth increase in the economy, we would expect to observe
  1. bond prices and interest rates both rise.
  2. bond prices and interest rates both fall.
  3. bond price rise and interest rates fall.
  4. bond prices fall and interest rates rise.
If the expected gains on stocks rise, while the expected returns on bonds do not change, then
a. the demand curve for bonds will shift to the right.
b. the supply curve for loanable funds will shift to the right.
c. the equilibrium interest rate will fall.
d. the equilibrium interest rate will rise.
If the expected gains on stocks rise, while the expected returns on bonds do not change, then
a. the demand curve for bonds will shift to the left.
b. the supply curve for loanable funds will shift to the right.
c. the demand curve for loanable funds will shift to the left.
d. the equilibrium interest rate will fall.
Which age group typically has the highest savings rate?
a. Young people
b. Middle-aged people
c. Elderly people
d. Savings rates are approximately the same for all age groups
The life-cycle model of consumption and saving focuses on
a. the tendency of young consumers to purchase fashionable or trendy goods.
b. the tendency of older people to be very reluctant to spend.
c. the pattern of using the financial system to match saving with consumption needs.
d. the reluctance of most Americans to save for retirement.
Which of the following statements concerning the relation among consumption, saving, and income over the life cycle is INCORRECT?
a. Individuals who have recently entered the labor force tend to consume more than they earn.
b. Individuals who are in their peak earning years tend to have positive savings.
c. Individuals who are retired tend to finance part of their consumption by borrowing.
d. Most households attempt to even out the amount they consume over their life cycles.
An increase in expected inflation
a. usually leads to falling nominal interest rates.
b. results in increased nominal capital gains on physical assets.
c. will shift the bond demand curve to the right.