Investments 8th Canadian Edition Test Bank

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Student: ___________________________________________________________________________

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%

2.    Over the past year you earned a nominal rate of interest of 8 percent on your money. The inflation rate was 4 percent over the same period. The exact actual growth rate of your purchasing power was
A. 15.5%.
B. 10.0%.
C. 3.8%.
D. 4.8%.
E. 15.0%.

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 these.

4.    If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately
A. 1%.
B. 9%.
C. 20%.
D. 15%.
E. none of these.

5.    You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $29. What was your holding period return?
A. 45%
B. 50%
C. 5%
D. 40%
E. none of these

6.    You purchased a share of stock for $30. One year later you received $1.50 as a dividend and sold the share for $32.25. What was your holding-period return?
A. 12.5%
B. 12.0%
C. 13.6%
D. 11.8%
E. 14.1%

7.    Which of the following determine(s) the level of real interest rates?

I) The supply of savings by households and business firms.
II) The demand for investment funds.
III) The government’s net supply and/or demand for funds.
A. I only.
B. II only.
C. I and II only.
D. I, II, and III (all of these).
E. None of these.

8.    Which of the following statement(s) is (are) true?

I) The real rate of interest is determined by the supply and demand for funds.
II) The real rate of interest is determined by the expected rate of inflation.
III) The real rate of interest can be affected by actions of the Bank of Canada.
IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.
A. I and II only.
B. I and III only.
C. III and IV only.
D. II and III only.
E. I, II, III, and IV only.

9.    Which of the following statement(s) is (are) true?
A. Inflation has no effect on the nominal rate of interest.
B. The realized nominal rate of interest is always positive.
C. The realized nominal rate of interest is always greater than the real rate of interest.
D. Certificates of deposit offer a guaranteed real rate of interest.
E. None of these is true.

10.  Other things equal, an increase in the government budget deficit
A. drives the interest rate down.
B. drives the interest rate up.
C. might not have any effect on interest rates.
D. increases business prospects.
E. none of these.

11.  Ceteris paribus, a decrease in the demand for loanable funds
A. drives the interest rate down.
B. drives the interest rate up.
C. might not have any effect on interest rate.
D. results from an increase in business prospects and a decrease in the level of savings.
E. none of these.

12.  The holding period return (HPR) on a share of stock is equal to
A. the capital gain yield over the period plus the inflation rate.
B. the capital gain yield over the period plus the dividend yield.
C. the current yield plus the dividend yield.
D. the dividend yield plus the risk premium.
E. the change in stock price