Question

increases business prospects.

13. 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 rates.

D. results from an increase in business prospects and a decrease in the level of savings. E. results from an increase in business prospects and a increase in the level of savings.

14. The holding-period return (HPR) on a share of stock is equal to A. the capital gain yield during the period, plus the inflation rate.

B. the capital gain yield during 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.

15. Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2009 show that

A. stocks offered investors greater rates of return than bonds and bills.

B. stock returns were less volatile than those of bonds and bills.

C. bonds offered investors greater rates of return than stocks and bills. D. bills outperformed stocks and bonds.

E. treasury bills always offered a rate of return greater than inflation.

16. If the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation:

A. borrowers gain and savers lose.

B. savers gain and borrowers lose.

C. both borrowers and savers lose.

D. neither borrowers nor savers gain or lose. E. both borrowers and savers gain.

You have been given this probability distribution for the holding-period return for KMP stock:

Answer 1

13.The answer is A. drives the interest rates down.

A decrease in the demand of loanable funds will drive the interest down because in the market there will be more no. lenders than borrowers when the demand of loanable funds is decreased. So, excess supply and lower demand will bring down the interest rate so that a balance can be created between demand and supply.

14. The answer is B. the capital gain yield during the period, plus the dividend yield.

Holding period return = (selling price - purchase price)/purchase price + dividend received/current stock price

In the above formula, 1st term is capital gain yield which tells us the capital gain (selling price - purchase price) return earned and 2nd term is dividend yield i.e. the dividend rate of return.