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Bank Quiz

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Chapter 05
Learning about Return and Risk from the Historical Record

Multiple Choice Questions 1. Over the past year you earned a nominal rate of interest of 10 percent on your money. The inflation rate was 5 percent over the same period. The exact actual growth rate of your purchasing power was
A. 15.5%.
B. 10.0%.
C. 5.0%.
D. 4.8%.
E. 15.0% r = (1+R) / (1+i) - 1; 1.10% / 1.05% - 1 = 4.8%. Difficulty: Moderate 3. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 7%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?
A. 4%.
B. 10%.
C. 7%.
D. 3%.
E. none of the above.
7% - 3% = 4%.

Difficulty: Easy

7. You purchased …show more content…

17.91%
D. 18.18%
E. None of the above
E(P1) = .25 (54/55 - 1) + .40 (64/55 - 1) + .35 (74/55 - 1) = 18.18%. Difficulty: Difficult 26. Your Certificate of Deposit will mature in one week and you are considering how to invest the proceeds. If you invest in a 30-day CD the bank will pay you 4%. If you invest in a 2-year CD the bank will pay you 6% interest. Which option would you choose?
A. the 30-day CD, no matter what you expect interest rates to do in the future
B. the 2-year CD, no matter what you expect interest rates to do in the future
C. the 30-day CD if you expect that interest rates will fall in the future
D. the 2-year CD if you expect that interest rates will fall in the future
E. You would be indifferent between the 30-day and the 2-year CDs.
You would prefer to lock in the higher rate on the 2-year CD rather than subject yourself to reinvestment rate risk. If you expected interest rates to rise in the future the opposite choice would be better. Difficulty: Moderate 28. If the Federal Reserve lowers the discount rate, ceteris paribus, the equilibrium levels of funds lent will __________ and the equilibrium level of real interest rates will ___________.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
E. reverse direction from their previous trends
A lower discount rate would encourage banks to make more loans, which would increase the money supply. The supply curve would shift to the right

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