Question 1   Multiple Choice (1.0000 points)
  Question: The relationship between nominal interest rates, real interest rates, and the expected rate of inflation is called:
    The Friedman equation.
The Greenspan relationship.
The Veblen effect.
The Fisher equation.
The Keynes equation.

Question 2   Multiple Choice (1.0000 points)
  Question: The real interest rate:
    Is different for each person.
Does not change when inflationary expectations adjust.
Is most influenced by perceptions of default risk.
Usually exceeds the nominal interest rate.
Has historically remained at approximately 5%.

Question 3   Multiple Choice (1.0000 points)
  Question: Which of the following is the most liquid investment?
    Real estate
Treasury securities
Common stock of small, closely-held firms
Fine art

Question 4   Multiple Choice (1.0000 points)
  Question: Which firm has the greatest degree of business risk?
    A desktop publishing firm that rents office space
A railroad that owns all its locomotives and boxcars.
An accounting firm in a large city with numerous competitors
An airline that leases all its aircraft
A talent agency that represents rising hip-hop acts

Question 5   Multiple Choice (1.0000 points)
  Question: If the nominal rate of interest is 10%, the expected rate of inflation is 3%, and the sum of the risk premiums is 5%, what is the real interest rate?

Question 6   Multiple Choice (1.0000 points)
  Question: Bonds rated Baa by Moody's:
    Typically have lower yields than those rated Aaa.
Do not necessarily carry higher levels of inflation risk than those rated Aa.
Are subject to higher federal income tax rates than bonds rated A.
Are considered to be junk bonds.
Are sold by firms with higher levels of business risk than those rated B.

Question 7   Multiple Choice (1.0000 points)
  Question: Assume the 1-year interest rate is 4%, the 1-year rate expected in year 2 is 4%, and the expected 1-year rate in year 3 is 10%. According to the pure expectations theory, what is the approximate 3-year rate?