HW 5 Corporate Finance Chapter 5 Interest rate 1 Which of th

HW 5 Corporate Finance Chapter 5 Interest rate 1) Which of the following statements is FALSE? A) The relationship between the investment term and the interest rate is called the term structure of interest rates. B) Real interest rates indicate the rate at which your money will grow if invested for a certain period. C) The yield curve is a potential leading indicator of future economic growth. D) The shape of the yield curve will be strongly influenced by interest rate expectations. 2) Which of the following statements is FALSE? A) The yield curve changes over time. B) The formulas for computing present values of annuities and perpetuities cannot be used in situations in which cash flows need to be discounted at different rates C) We can use the term structure to compute the present and future values of a risk-free cash flow over different investment D) The yield curve tends to be inverted as the economy comes out of a recession 3) Which of the following statements is FALSE? A) An inverted yield curve generally signals an expected decline in future interest rates. B) An inverted yield curve is often interpreted as a positive forecast for economic growth. C) All the formulas for computing present values of annuities and perpetuities are based upon discounting all of the cash flows at the same rate. D) The rate of growth of your purchasing power is determined by the real interest rate. Use the table for the question(s) below: Suppose the term structure of interest rates is shown below OC SP 460 ?% 425% 4,15% 4) What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? 5) The present value of receiving $1000 per year with certainty at the end of the next three years is closest to

Solution

1.
Real interest rates indicate the rate at which your money will grow if invested for a certain period
2.
The yield curve tends to be inverted as the economy comes out of a recession
3.
The rate of growth of your purchasing power is determined by the real interest rate
4.
Inverted
Decreasing or lower
5.
=1000/1.05+1000/1.048^2+1000/1.046^3=2736.661406
6.
When interest on a loan is tax deductible the effective after-tax interest rate is...
7.
Taxes reduce the amount of interest the investor can keep, and we refer to this reduced amount as the tax effective interest rate
8.
yield to maturity
9.
10.
=1000*5%/1.0325+(1000*5%+1000)/1.035^2=1028.612386