100 MULTIPLE-CHOICE QUESTIONS WITH ANSWERS RELATED TO CAPITAL AND INTEREST
What is the definition of capital?
A) Money used for investment
B) The profit earned from an investment
C) The total assets owned by a company
D) The interest accrued on an investment
Answer: A) Money used for investment
Which of the following is NOT a type of capital?
A) Financial capital
B) Human capital
C) Social capital
D) Operational capital
Answer: D) Operational capital
Gross interest is calculated:
A) After deducting taxes
B) Before deducting taxes
C) By factoring in inflation rates
D) After deducting operational costs
Answer: B) Before deducting taxes
Net interest refers to:
A) Interest earned after taxes and deductions
B) Interest earned before deductions
C) Interest accrued annually
D) Interest compounded monthly
Answer: A) Interest earned after taxes and deductions
Which type of interest is calculated on the initial principal and the accumulated interest from previous periods?
A) Simple interest
B) Compound interest
C) Nominal interest
D) Real interest
Answer: B) Compound interest
If the nominal interest rate is 8% and the inflation rate is 3%, what is the real interest rate?
A) 8%
B) 11%
C) 5%
D) 3%
Answer: C) 5%
Which type of capital represents the knowledge, skills, and capabilities of individuals?
A) Financial capital
B) Human capital
C) Social capital
D) Cultural capital
Answer: B) Human capital
What does the term ‘opportunity cost’ mean in relation to capital?
A) The cost of investing in different types of capital
B) The cost of forgoing the next best alternative when choosing how to use capital
C) The cost of borrowing capital from financial institutions
D) The cost of interest on capital investments
Answer: B) The cost of forgoing the next best alternative when choosing how to use capital
When considering time value of money, which statement is true?
A) Money has the same value regardless of when it is received or paid
B) Money received today is worth more than the same amount received in the future
C) Money received in the future is worth more than the same amount received today
D) Money has no value over time
Answer: B) Money received today is worth more than the same amount received in the future
The formula for calculating simple interest is:
A) A = P(1 + rt)
B) A = P(1 – rt)
C) A = P + rt
D) A = P + r/t
Answer: C) A = P + rt
What is the primary purpose of capital in an economic context?
A) Generating profit
B) Reducing inflation
C) Stabilizing markets
D) Creating employment opportunities
Answer: A) Generating profit
Which factor affects the supply of loanable funds in a market economy?
A) Gross domestic product (GDP)
B) Interest rates
C) Government spending
D) Consumer preferences
Answer: B) Interest rates
The term ‘liquidity preference’ refers to:
A) The desire to hold wealth in the form of money or liquid assets
B) Investing in long-term assets
C) Borrowing funds for short-term purposes
D) The reluctance to invest in financial markets
Answer: A) The desire to hold wealth in the form of money or liquid assets
What happens to the present value of a future sum as the interest rate increases?
A) Present value decreases
B) Present value increases
C) Present value remains constant
D) Present value fluctuates unpredictably
Answer: A) Present value decreases
Which of the following represents the relationship between interest rates and bond prices?
A) Inverse relationship
B) Direct relationship
C) No relationship
D) Random relationship
Answer: A) Inverse relationship
Real interest rates are nominal interest rates adjusted for:
A) Inflation
B) Taxes
C) Administrative costs
D) Exchange rates
Answer: A) Inflation
When does the compounding frequency of interest have the most significant impact on the total interest earned?
A) Higher interest rates
B) Longer investment periods
C) Shorter investment periods
D) Fixed interest rates
Answer: B) Longer investment periods
Which type of interest is charged on both the principal amount and the accrued interest?
A) Simple interest
B) Compound interest
C) Nominal interest
D) Real interest
Answer: B) Compound interest
How does a higher risk associated with an investment typically affect the interest rate?
A) Interest rates decrease
B) Interest rates remain constant
C) Interest rates increase
D) Interest rates become unpredictable
Answer: C) Interest rates increase
The concept of ‘time preference’ refers to:
A) The idea that people prefer immediate benefits over future benefits
B) The preference for long-term investments
C) The aversion to time-based risks in investments
D) The willingness to wait for higher interest rates
What is the formula for calculating the future value of an investment with compound interest?
A) FV = PV(1 + r)^t
B) FV = PV / (1 + r)^t
C) FV = PV + rt
D) FV = PV(1 – rt)
Answer: A) FV = PV(1 + r)^t
Which term refers to the risk of loss due to changes in interest rates?
A) Market risk
B) Inflation risk
C) Interest rate risk
D) Liquidity risk
Answer: C) Interest rate risk
The present value of a future sum of money:
A) Increases with higher interest rates
B) Decreases with longer time periods
C) Increases with longer time periods
D) Decreases with lower interest rates
Answer: D) Decreases with lower interest rates
When might an individual prefer a fixed interest rate over a variable interest rate?
A) During times of economic uncertainty
B) When interest rates are expected to rise
C) In a stable economic environment
D) When seeking short-term loans
Answer: C) In a stable economic environment
What is the opportunity cost associated with capital investment?
A) The potential gain from investing in capital
B) The cost of choosing one investment over another
C) The interest earned on invested capital
D) The cost of borrowing capital
Answer: B) The cost of choosing one investment over another
In the context of bond prices, when interest rates rise:
A) Bond prices rise
B) Bond prices remain unchanged
C) Bond prices fall
D) Bond prices become unpredictable
Answer: C) Bond prices fall
What factor determines the interest rate in an economy?
A) Government spending
B) Supply and demand for money
C) Currency exchange rates
D) Consumer preferences
Answer: B) Supply and demand for money
Which type of capital represents the networks, relationships, and connections within a community?
A) Financial capital
B) Human capital
C) Social capital
D) Intellectual capital
Answer: C) Social capital
The term ‘usury’ refers to:
A) Charging an interest rate below the market rate
B) Illegal or excessive interest rates
C) A fixed interest rate
D) Interest rates set by the government
Answer: B) Illegal or excessive interest rates
Which term refers to the increase in the value of an asset over time?
A) Interest
B) Capital gain
C) Dividend
D) Depreciation
Answer: B) Capital gain
What happens to the present value of an investment if the discount rate decreases?
A) Present value increases
B) Present value decreases
C) Present value remains unchanged
D) Present value becomes unpredictable
Answer: A) Present value increases
The term ‘coupon rate’ refers to the:
A) Total interest paid over the life of a bond
B) Face value of a bond
C) Annual interest payment as a percentage of a bond’s face value
D) Market value of a bond
Answer: C) Annual interest payment as a percentage of a bond’s face value
How does the Federal Reserve changing the federal funds rate impact the economy?
A) Decreases borrowing costs
B) Increases unemployment rates
C) Reduces government spending
D) Raises inflation rates
Answer: A) Decreases borrowing costs
Which term describes the situation where a borrower defaults on a loan due to an inability to meet interest or principal payments?
A) Insolvency
B) Liquidation
C) Bankruptcy
D) Default risk
Answer: D) Default risk
What is the primary purpose of the Federal Open Market Committee (FOMC)?
A) Regulating international trade
B) Controlling fiscal policy
C) Supervising commercial banks
D) Setting monetary policy and interest rates
Answer: D) Setting monetary policy and interest rates
Which of the following is an example of non-financial capital?
A) Stocks and bonds
B) Machinery and equipment
C) Savings accounts
D) Treasury bills
Answer: B) Machinery and equipment
What does the term “maturity date” refer to in the context of financial instruments?
A) The date of purchase
B) The date when interest is paid
C) The date when the principal amount is repaid
D) The date of issuance
Answer: C) The date when the principal amount is repaid
How does a rise in the money supply affect interest rates, assuming all else remains constant?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: B) Interest rates fall
In a scenario where inflation exceeds the nominal interest rate, the real interest rate is:
A) Negative
B) Zero
C) Equal to the nominal interest rate
D) Unaffected by inflation
Answer: A) Negative
Which factor primarily determines the future value of an investment?
A) Initial investment amount
B) Time period
C) Interest rate
D) All of the above
Answer: D) All of the above
The Fisher effect suggests a direct relationship between:
A) Inflation and unemployment
B) Nominal interest rates and real interest rates
C) Government spending and interest rates
D) Savings and investment
Answer: B) Nominal interest rates and real interest rates
What effect does a decrease in the supply of loanable funds have on interest rates?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: A) Interest rates rise
Which term refers to the interest rate at which banks lend to each other overnight?
A) Prime rate
B) Federal funds rate
C) Discount rate
D) LIBOR rate
Answer: B) Federal funds rate
When the present value of an investment is greater than its cost, the investment is considered:
A) Profitable
B) Risky
C) Unfeasible
D) Inexpensive
Answer: A) Profitable
What happens to bond prices when market interest rates decline?
A) Bond prices rise
B) Bond prices fall
C) Bond prices remain unchanged
D) Bond prices become unpredictable
Answer: A) Bond prices rise
What is the purpose of using the present value formula in finance?
A) To calculate future values
B) To assess the current worth of future cash flows
C) To determine the interest rate
D) To calculate compound interest
Answer: B) To assess the current worth of future cash flows
What impact does an increase in the demand for loanable funds have on interest rates?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: A) Interest rates rise
In finance, what does the term ‘discounting’ refer to?
A) Selling securities at a lower price than their face value
B) Offering discounts on loans
C) Reducing interest rates
D) Calculating the present value of future cash flows
Answer: D) Calculating the present value of future cash flows
Which factor is least likely to influence the demand for loanable funds?
A) Government borrowing
B) Consumer confidence
C) Changes in technology
D) Changes in the money supply
Answer: D) Changes in the money supply
What does the term “bond yield” refer to?
A) The annual interest payment on a bond
B) The total return on a bond
C) The maturity value of a bond
D) The price of a bond
Answer: B) The total return on a bond
Which type of interest is calculated only on the initial principal amount?
A) Simple interest
B) Compound interest
C) Nominal interest
D) Real interest
Answer: A) Simple interest
The term ‘capital adequacy ratio’ refers to:
A) The ratio of capital to liabilities
B) The ratio of assets to liabilities
C) The ratio of reserves to deposits
D) The ratio of equity to risk-weighted assets
Answer: D) The ratio of equity to risk-weighted assets
What is the formula to calculate the present value of a future sum of money?
A) PV = FV / (1 + r)^t
B) PV = FV * (1 + r)^t
C) PV = FV – rt
D) PV = FV(1 – r)^t
Answer: A) PV = FV / (1 + r)^t
When the interest rate on a loan is higher than the rate of inflation, the real interest rate is:
A) Negative
B) Equal to the inflation rate
C) Positive
D) Unaffected by inflation
Answer: C) Positive
The term ‘disintermediation’ refers to:
A) The process of banks acquiring funds from depositors
B) The transfer of funds from low-risk to high-risk investments
C) The shift of funds from banks to non-bank financial institutions
D) The reduction of interest rates on loans
Answer: C) The shift of funds from banks to non-bank financial institutions
What is the primary function of a central bank in regulating interest rates?
A) Controlling inflation
B) Regulating taxes
C) Managing government spending
D) Supervising commercial banks
Answer: A) Controlling inflation
Which term refers to the cost of borrowing or the return on lending money?
A) Interest
B) Dividend
C) Yield
D) Inflation
Answer: A) Interest
What is the relationship between bond prices and interest rates when bond maturity increases?
A) Bond prices rise
B) Bond prices fall
C) Bond prices remain unchanged
D) Bond prices become unpredictable
Answer: B) Bond prices fall
The term ‘risk-free rate’ in finance refers to the interest rate on:
A) Corporate bonds
B) Government securities
C) High-yield bonds
D) Mortgage-backed securities
Answer: B) Government securities
Which factor primarily determines the level of interest rates in an economy?
A) Economic growth rate
B) Government budget deficit
C) Monetary policy
D) Demand and supply of loanable funds
Answer: D) Demand and supply of loanable funds
Which of the following is an example of non-financial capital?
A) Stocks and bonds
B) Machinery and equipment
C) Savings accounts
D) Treasury bills
Answer: B) Machinery and equipment
What does the term “maturity date” refer to in the context of financial instruments?
A) The date of purchase
B) The date when interest is paid
C) The date when the principal amount is repaid
D) The date of issuance
Answer: C) The date when the principal amount is repaid
How does the demand for loanable funds typically behave concerning interest rates?
A) Increases with lower interest rates
B) Decreases with higher interest rates
C) Remains unaffected by interest rates
D) Decreases with lower interest rates
Answer: A) Increases with lower interest rates
In what circumstances does the concept of “time preference” generally hold true?
A) During economic recessions
B) In a stable economic environment
C) During periods of high inflation
D) When interest rates are volatile
Answer: B) In a stable economic environment
What does the term “opportunity cost of capital” refer to?
A) The cost of borrowing capital
B) The potential return given up by choosing one investment over another
C) The interest earned on invested capital
D) The cost of maintaining capital assets
Answer: B) The potential return given up by choosing one investment over another
In the context of bonds, how do bond prices typically behave when interest rates rise?
A) Bond prices rise
B) Bond prices fall
C) Bond prices remain unchanged
D) Bond prices decrease unpredictably
Answer: B) Bond prices fall
What primarily determines the equilibrium interest rate in the loanable funds market?
A) Government regulations
B) Supply and demand for money
C) Central bank policies
D) Corporate borrowing behavior
Answer: B) Supply and demand for money
Which type of capital refers to the trust, social relations, and networks that facilitate cooperation?
A) Financial capital
B) Human capital
C) Physical capital
D) Social capital
Answer: D) Social capital
What is usury?
A) High interest rates set by governments
B) Excessively low interest rates
C) Illegal or excessive interest rates
D) Variable interest rates
Answer: C) Illegal or excessive interest rates
What is a capital gain?
A) Interest earned on savings accounts
B) Profits earned from selling assets at a higher price than the purchase price
C) Dividend payments from stocks
D) Interest payments on bonds
Answer: B) Profits earned from selling assets at a higher price than the purchase price
What happens to the present value of an investment if the time period increases?
A) Present value decreases
B) Present value increases
C) Present value remains unchanged
D) Present value becomes unpredictable
Answer: B) Present value increases
What does the coupon rate on a bond represent?
A) The total return on the bond
B) The current market value of the bond
C) The annual interest payment as a percentage of the bond’s face value
D) The yield to maturity of the bond
Answer: C) The annual interest payment as a percentage of the bond’s face value
How does a decrease in interest rates affect borrowing costs?
A) Increases borrowing costs
B) Decreases borrowing costs
C) Has no impact on borrowing costs
D) Makes borrowing costs unpredictable
Answer: B) Decreases borrowing costs
What risk is associated with the possibility that a borrower may fail to repay a loan?
A) Market risk
B) Inflation risk
C) Default risk
D) Credit risk
Answer: C) Default risk
What is the primary role of the central bank concerning monetary policy and interest rates?
A) Controlling government spending
B) Regulating financial markets
C) Setting monetary policy and interest rates
D) Managing exchange rates
Answer: C) Setting monetary policy and interest rates
When the Federal Reserve conducts contractionary monetary policy, what happens to interest rates?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: A) Interest rates rise
What does the term “yield spread” represent?
A) Difference between nominal and real interest rates
B) Difference between corporate and government bond yields
C) Difference between short-term and long-term interest rates
D) Difference between savings and investment rates
Answer: B) Difference between corporate and government bond yields
What primarily influences the federal funds rate?
A) Government spending
B) Market demand for money
C) Corporate borrowing behavior
D) Central bank regulations
Answer: B) Market demand for money
What does the “efficient market hypothesis” suggest about asset prices?
A) They are influenced by government policies
B) They reflect all available information
C) They are volatile and unpredictable
D) They are unaffected by interest rates
Answer: B) They reflect all available information
How does an increase in the prime rate affect borrowing costs for consumers?
A) Decreases borrowing costs
B) Increases borrowing costs
C) Has no impact on borrowing costs
D) Makes borrowing costs unpredictable
Answer: B) Increases borrowing costs
What does the “swap spread” measure in financial markets?
A) Difference between fixed and variable interest rates
B) Difference between LIBOR rates and government bond yields
C) Difference between nominal and real interest rates
D) Difference between corporate and municipal bond yields
Answer: D) Difference between corporate and municipal bond yields
How does an increase in a borrower’s credit rating affect interest rates?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: B) Interest rates fall
What is a collateralized debt obligation (CDO)?
A) Type of loan offered by commercial banks
B) Pool of various debts packaged and sold as securities
C) Financial instrument used in foreign exchange markets
D) Government program for debt relief
Answer: B) Pool of various debts packaged and sold as securities
When the Federal Reserve implements contractionary monetary policy, what happens to interest rates?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: A) Interest rates rise
What primarily determines the federal funds rate?
A) Government spending
B) Market demand for money
C) Corporate borrowing behavior
D) Central bank regulations
Answer: B) Market demand for money
What is the primary function of the Federal Reserve in relation to interest rates?
A) Setting fiscal policy
B) Regulating financial markets
C) Setting monetary policy
D) Controlling inflation
Answer: C) Setting monetary policy
Which factor primarily determines the nominal interest rate in an economy?
A) Real GDP growth rate
B) Inflation expectations
C) Government debt
D) Central bank policies
Answer: B) Inflation expectations
How does an increase in the risk associated with an investment impact the interest rate demanded by lenders?
A) Interest rates decrease
B) Interest rates remain unchanged
C) Interest rates increase
D) Interest rates become unpredictable
Answer: C) Interest rates increase
Which factor typically influences the demand for loanable funds?
A) Inflation rates
B) Government regulations
C) Foreign exchange rates
D) Consumer preferences
Answer: D) Consumer preferences
What does the term “opportunity cost of capital” refer to?
A) The cost of borrowing capital
B) The potential return given up by choosing one investment over another
C) The interest earned on invested capital
D) The cost of maintaining capital assets
Answer: B) The potential return given up by choosing one investment over another
How does an increase in the risk-free rate impact other interest rates in the economy?
A) Other interest rates rise
B) Other interest rates fall
C) Other interest rates remain unchanged
D) Other interest rates become unpredictable
Answer: A) Other interest rates rise
When does compound interest result in the highest total return on an investment?
A) Shorter investment periods
B) Fixed interest rates
C) Lower compounding frequencies
D) Longer investment periods
Answer: D) Longer investment periods
The term ‘discount rate’ is used in the context of:
A) Calculating present value
B) Calculating future value
C) Calculating compound interest
D) Determining coupon rates on bonds
Answer: A) Calculating present value
What is the primary role of interest rates in financial markets?
A) Balancing budget deficits
B) Allocating resources efficiently
C) Regulating stock prices
D) Managing foreign exchange rates
Answer: B) Allocating resources efficiently
How does an increase in the supply of loanable funds impact interest rates?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: B) Interest rates fall
What is the primary impact of interest rates on the housing market?
A) Higher interest rates decrease housing demand
B) Lower interest rates decrease housing supply
C) Interest rates have no impact on the housing market
D) Interest rates affect rental prices more than property values
Answer: A) Higher interest rates decrease housing demand
Which factor primarily influences the coupon rate on a bond?
A) Inflation rate
B) Market demand
C) Government policies
D) Issuer’s creditworthiness
Answer: D) Issuer’s creditworthiness
The term ‘liquidity preference theory’ is associated with the relationship between interest rates and:
A) Money supply
B) Bond prices
C) Inflation rates
D) Government spending
Answer: A) Money supply
What impact does an increase in the money supply have on interest rates, assuming all else remains constant?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: B) Interest rates fall
The term ‘present value’ represents the current worth of:
A) Future cash flows
B) Past cash flows
C) Current cash flows
D) Total cash flows
Answer: A) Future cash flows
How do interest rates affect the cost of borrowing for businesses?
A) Higher interest rates reduce borrowing costs
B) Lower interest rates increase borrowing costs
C) Interest rates have no impact on borrowing costs
D) Interest rates make borrowing costs unpredictable
Answer: B) Lower interest rates increase borrowing costs
The term ‘yield curve’ represents the relationship between:
A) Inflation rates and interest rates
B) Different types of bonds
C) Time to maturity and interest rates
D) Market demand and supply
Answer: C) Time to maturity and interest rates
What is the primary role of interest rates in an economy?
A) Regulating inflation
B) Controlling government spending
C) Managing fiscal policy
D) Balancing trade deficits
Answer: A) Regulating inflation
The term ‘discounting’ in finance refers to the process of:
A) Selling securities at a lower price than their face value
B) Offering discounts on loans
C) Calculating the present value of future cash flows
D) Reducing interest rates on loans
Answer: C) Calculating the present value of future cash flows
Which factor primarily determines the rate of return on an investment?
A) Inflation rates
B) Interest rates
C) Risk associated with the investment
D) Time horizon of the investment
Answer: B) Interest rates
The term ‘real interest rate’ is the nominal interest rate adjusted for:
A) Taxes
B) Inflation
C) Market fluctuations
D) Foreign exchange rates
Answer: B) Inflation
What impact does an increase in credit risk have on interest rates?
A) Interest rates decrease
B) Interest rates remain unchanged
C) Interest rates increase
D) Interest rates become unpredictable
Answer: C) Interest rates increase
The term ‘annuity’ refers to a series of:
A) Unequal cash flows over time
B) Irregular cash flows
C) Equal cash flows over a specific period
D) Decreasing cash flows over time
Answer: C) Equal cash flows over a specific period
What effect does an increase in the risk premium have on interest rates?
A) Interest rates decrease
B) Interest rates remain unchanged
C) Interest rates increase
D) Interest rates become unpredictable
Answer: C) Interest rates increase
When comparing fixed-rate and adjustable-rate mortgages, which is more susceptible to interest rate fluctuations?
A) Fixed-rate mortgages
B) Adjustable-rate mortgages
C) Both are equally susceptible
D) Neither is affected by interest rate changes
Answer: B) Adjustable-rate mortgages
What does the term ‘time preference’ indicate in the context of capital and interest?
A) The preference for long-term investments
B) The willingness to defer immediate consumption for future benefits
C) The preference for short-term gains over long-term returns
D) The interest accrued over time
Answer: B) The willingness to defer immediate consumption for future benefits
The term ‘yield to maturity’ on a bond represents:
A) The current market value of the bond
B) The annual interest payment as a percentage of the bond’s face value
C) The total return on the bond if held until maturity
D) The yield at a specific point in time
Answer: C) The total return on the bond if held until maturity
What impact does an increase in the money supply have on interest rates, assuming all else remains constant?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: B) Interest rates fall
How do interest rates impact the purchasing power of money?
A) Higher interest rates increase purchasing power
B) Lower interest rates decrease purchasing power
C) Interest rates have no impact on purchasing power
D) Interest rates make purchasing power unpredictable
Answer: B) Lower interest rates decrease purchasing power
What impact does an increase in the Federal Reserve’s discount rate have on interest rates in the economy?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: A) Interest rates rise
The term ‘debt maturity’ refers to:
A) The total amount of debt owed by an entity
B) The duration until debt repayment
C) The interest payment schedule on debt
D) The market value of debt securities
Answer: B) The duration until debt repayment
How does an increase in the risk-free rate affect the cost of borrowing for businesses?
A) It decreases borrowing costs
B) It increases borrowing costs
C) It has no impact on borrowing costs
D) It makes borrowing costs unpredictable
Answer: B) It increases borrowing costs
The term ‘economic rent’ in finance refers to:
A) Interest earned on savings accounts
B) Additional payment for resources above their opportunity cost
C) Government subsidies on loans
D) Interest payments on bonds
Answer: B) Additional payment for resources above their opportunity cost
What effect does an increase in the risk premium have on interest rates?
A) Interest rates decrease
B) Interest rates remain unchanged
C) Interest rates increase
D) Interest rates become unpredictable
Answer: C) Interest rates increase
When the yield curve steepens, what does this indicate about future interest rate expectations?
A) Expectations of decreasing interest rates
B) Expectations of increasing interest rates
C) Expectations of stable interest rates
D) Uncertainty about future interest rates
Answer: B) Expectations of increasing interest rates
What is the primary factor that influences the yield on a bond?
A) Maturity date
B) Coupon rate
C) Market demand
D) Inflation rate
Answer: B) Coupon rate
The term ‘discounting’ in finance refers to the process of:
A) Selling securities at a lower price than their face value
B) Offering discounts on loans
C) Calculating the present value of future cash flows
D) Reducing interest rates on loans
Answer: C) Calculating the present value of future cash flows
When comparing fixed-rate and adjustable-rate mortgages, which is more susceptible to interest rate fluctuations?
A) Fixed-rate mortgages
B) Adjustable-rate mortgages
C) Both are equally susceptible
D) Neither is affected by interest rate changes
Answer: B) Adjustable-rate mortgages
What is the primary factor that influences the yield on a bond?
A) Maturity date
B) Coupon rate
C) Market demand
D) Inflation rate
Answer: B) Coupon rate
The term ‘risk premium’ refers to the additional return required by investors for:
A) Low-risk investments
B) High-risk investments
C) Government securities
D) Corporate bonds
Answer: B) High-risk investments
What does the term ‘term structure of interest rates’ indicate?
A) The relationship between short-term and long-term interest rates
B) The variability of interest rates across different financial markets
C) The impact of inflation on interest rates
D) The trend of interest rates over a specified period
Answer: A) The relationship between short-term and long-term interest rates
How do interest rates affect the cost of borrowing for businesses?
A) Higher interest rates reduce borrowing costs
B) Lower interest rates increase borrowing costs
C) Interest rates have no impact on borrowing costs
D) Interest rates make borrowing costs unpredictable
Answer: B) Lower interest rates increase borrowing costs
Which factor primarily determines the rate of return on an investment?
A) Inflation rates
B) Interest rates
C) Risk associated with the investment
D) Time horizon of the investment
Answer: B) Interest rates
The term ‘real interest rate’ is the nominal interest rate adjusted for:
A) Taxes
B) Inflation
C) Market fluctuations
D) Foreign exchange rates
Answer: B) Inflation
What impact does an increase in the money supply have on interest rates, assuming all else remains constant?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: B) Interest rates fall
The term ‘economic rent’ in finance refers to:
A) Interest earned on savings accounts
B) Additional payment for resources above their opportunity cost
C) Government subsidies on loans
D) Interest payments on bonds
Answer: B) Additional payment for resources above their opportunity cost
How do interest rates impact the purchasing power of money?
A) Higher interest rates increase purchasing power
B) Lower interest rates decrease purchasing power
C) Interest rates have no impact on purchasing power
D) Interest rates make purchasing power unpredictable
Answer: B) Lower interest rates decrease purchasing power
What impact does an increase in credit risk have on interest rates?
A) Interest rates decrease
B) Interest rates remain unchanged
C) Interest rates increase
D) Interest rates become unpredictable
Answer: C) Interest rates increase
The term ‘liquidity preference theory’ is associated with the relationship between interest rates and:
A) Money supply
B) Bond prices
C) Inflation rates
D) Government spending
Answer: A) Money supply
How does an increase in the Federal Reserve’s discount rate affect interest rates in the economy?
A) Interest rates rise
B) Interest rates fall
C) Interest rates remain unchanged
D) Interest rates become unpredictable
Answer: A) Interest rates rise
