Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity-influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements is true or false. Statements The larger the federal deficit, other things held constant, the higher are interest rates. Actions that lower short-term interest rates will always lower long-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve's ability to use monetary policy to control economic activity in the United States is limited because U.S. interest rates are highly dependent on interest rates in other parts of the world. True False O O O O 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 rate for a short-term riskless security when inflation is expected to be zero. This is the rate for a riskless security that is exposed to changes in inflation. This is the premium added to the risk-free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security's entire life. This is the difference between the interest rate on a U.S. Treasury bond and a corporate bond with the same maturity and marketability. This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss. As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain over the life of the security, this premium is added as a compensation for this uncertainty. Component Symbol | When payments are made at the end of each period, you can treat them as You are planning to put $5,500 in the bank at the end of each year for the next four years in hopes that you will have enough money for a new boat. If you are investing at an annual interest rate of 5%, how much money will you have at the end of four years-rounded to the nearest whole dollar? $28,447 OOO $24,891 $23,706 $18,965 You've decided to deposit your money in the bank at the beginning of the year instead of the end of the year, but now you are making payments of $5,500 at an annual interest rate of 5%. How much money will you have available at the end of four years-rounded to the nearest whole dollar? $17,424 $23,706 an annuity due $34,847 $24,891 Interest rates affect corporate profits and security prices. Based on your understanding of the relationship between interest rates and corporate profits and security prices, identify whether each statement is true or false. Statements Interest rates affect the level of economic activity, which in turn affects the profits earned by a business organization, all other considerations remaining constant. Interest rates will affect the preference of investors to own stocks versus owning bonds. A sharp decrease in interest rates will increase the price of bonds, which can significantly decrease the potential for capital gains and the yield earned by a bondholder. This should decrease the demand for bonds compared to the demand for stocks, all other considerations remaining constant. An increase in market interest rates will increase the opportunity cost of investors' funds and increase the price of financial assets. By how much would you expect the value of Hilary's perpetuity to change from when she purchased it until today? True Four years ago, Hilary purchased a perpetuity that agrees to pay her and her heirs $150 per month forever. At the time of purchase, Hilary was expecting to earn an annual return of 6.00%, but in the intervening years, the economy and the available investment alternatives have changed. In today's market, it is now reasonable to anticipate an annual return of 3.60%. O $20,000 O O $50,000 To further examine the relationship between interest rates and the price of financial assets, consider the effect of a change in an investor's required return, or opportunity cost, on the price of a financial asset. False O O Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity-influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements is true or false. Statements The larger the federal deficit, other things held constant, the higher are interest rates. Actions that lower short-term interest rates will always lower long-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve's ability to use monetary policy to control economic activity in the United States is limited because U.S. interest rates are highly dependent on interest rates in other parts of the world. True False O O O O 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 rate for a short-term riskless security when inflation is expected to be zero. This is the rate for a riskless security that is exposed to changes in inflation. This is the premium added to the risk-free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security's entire life. This is the difference between the interest rate on a U.S. Treasury bond and a corporate bond with the same maturity and marketability. This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss. As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain over the life of the security, this premium is added as a compensation for this uncertainty. Component Symbol | When payments are made at the end of each period, you can treat them as You are planning to put $5,500 in the bank at the end of each year for the next four years in hopes that you will have enough money for a new boat. If you are investing at an annual interest rate of 5%, how much money will you have at the end of four years-rounded to the nearest whole dollar? $28,447 OOO $24,891 $23,706 $18,965 You've decided to deposit your money in the bank at the beginning of the year instead of the end of the year, but now you are making payments of $5,500 at an annual interest rate of 5%. How much money will you have available at the end of four years-rounded to the nearest whole dollar? $17,424 $23,706 an annuity due $34,847 $24,891 Interest rates affect corporate profits and security prices. Based on your understanding of the relationship between interest rates and corporate profits and security prices, identify whether each statement is true or false. Statements Interest rates affect the level of economic activity, which in turn affects the profits earned by a business organization, all other considerations remaining constant. Interest rates will affect the preference of investors to own stocks versus owning bonds. A sharp decrease in interest rates will increase the price of bonds, which can significantly decrease the potential for capital gains and the yield earned by a bondholder. This should decrease the demand for bonds compared to the demand for stocks, all other considerations remaining constant. An increase in market interest rates will increase the opportunity cost of investors' funds and increase the price of financial assets. By how much would you expect the value of Hilary's perpetuity to change from when she purchased it until today? True Four years ago, Hilary purchased a perpetuity that agrees to pay her and her heirs $150 per month forever. At the time of purchase, Hilary was expecting to earn an annual return of 6.00%, but in the intervening years, the economy and the available investment alternatives have changed. In today's market, it is now reasonable to anticipate an annual return of 3.60%. O $20,000 O O $50,000 To further examine the relationship between interest rates and the price of financial assets, consider the effect of a change in an investor's required return, or opportunity cost, on the price of a financial asset. False O O