International Finance and Treasury MCQ Questions and Solutions with Explanations | Management

Liquidity premium theory, unbiased expectations theory and market segmentation theory are theories to describe term structure of interest rate. The liquidity premium theory states that bond investors prefer highly liquid, short-dated securities that can be sold quickly over long-dated ones. The theory also contends that investors are compensated for higher default risk and price risk from changes in interest rates. Unbiased Expectations Theory states that current long-term interest rates contain an implicit prediction of future short-term interest rates. Market segmentation theory is a theory that long and short-term interest rates are not related to each other. It also states that the prevailing interest rates for short, intermediate, and long-term bonds should be viewed separately like items in different markets for debt securities.

When interest rate is lower than equilibrium rate of borrowing loanable funds then financial system has deficit of funds.

Shift of demand curve to down and to left then there must be decreases in funds traded. A shift in the demand curve is when a determinant of demand other than price changes. It occurs when demand for goods and services changes even though the price didn't.

Formula of effective annual return is written as (1+r) c - 1. Effective annual return (EAR) is the annual rate that captures the magnifying effect of multiple compounding periods per year of an investment.

If equilibrium interest rate increases and curve of funding supplied shifts to left then impact on spending is increase in near term. The equilibrium interest rate is the rate at which the quantity of money demanded is equal to the quantity of money supplied. The Federal Reserve can alter the equilibrium interest rate by adjusting the supply of money. The demand for money and supply of money can be graphed to determine the equilibrium interest rate.

Monetary expansion increases and there is decrease in equilibrium interest rate then supply curve of funds must shift down and to right. Expansionary monetary policy is when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand. It boosts growth as measured by gross domestic product.

If demand of loanable demands decrease then borrowing cost of funds is lower. Cost of borrowing refers to the total amount a debtor pays to secure a loan and use funds, including financing costs, account maintenance, loan origination, and other loan-related expenses.

To create situation with no shortage of funds, relationship between funds supplied and funds demanded must have inverse relationship.

Funds demand which is pushed by users of funds in financial markets are classified as demand of loan-able funds. The demand for loanable funds represents the behavior of borrowers and the quantity of loans demanded. The lower the interest rate, the less expensive it is to borrow.

If equilibrium interest rate increases with respect to increase in interest rate, then movement along supply of funds curve is upside movement. The equilibrium interest rate is the rate at which the quantity of money demanded is equal to the quantity of money supplied. The Federal Reserve can alter the equilibrium interest rate by adjusting the supply of money. The demand for money and supply of money can be graphed to determine the equilibrium interest rate.