Exercise

Answer the following questions.

1. Order the reported interest rates from highest to lowest:

A. Federal funds rate, discount rate, broker call rate, prime rate

B. Prime rate, broker call rate, discount rate, federal funds rate

C. Prime rate, broker call rate, federal funds rate, discount rate

D. Broker call rate, prime rate, federal funds rate, discount rate

2. When interest rates rise, all of the following typically occur except:

A. Bond prices rise because investors can purchase new bonds at higher interest rates.

B. Stock prices fall as investors pull out of the stock market in favor of the bond market.

C. Many investors move from stocks into bonds.

D. The economy may slowdown.

3. Which of the following is not true?

A. Inflation can result when demand for goods and services outstrips their supply.

B. Inflation usually occurs near the end of an expansionary phase.

C. Credit spreads widen during expansionary periods of the business cycle and narrow during periods of contraction.

D. A bond’s credit spread increases, relative to a benchmark such as Treasury bills, when its credit rating declines.

4. If a government is running a budget deficit, what is the effect on interest rates?

A. They tend to rise.

B. They tend to fall.

C. They may rise or fall; there is no connection between a budget deficit and interest rates.

D. They tend to stay the same, neither rise nor fall.

5. Which of the following statements are true regarding yield curves?

I. A steep yield curve means investors see the future as particularly uncertain or volatile.

II. An inverted yield curve means investors think inte