Answer. (a) at which one would lend if there were no risk of default.
Explanation: A risk free rate is the rate of return on an investment where there is absolutely no risk. Thus this statement can be viewed from another perspective. A bank as an investor would lend at this risk free rate to anyone who doesnt have no risk of default, and thus it would be the return that the bank would get. In the other options, like the returns on savings deposits, there is still some risk (like bank illiequidity, government failure, etc).The last two options are not related anywhere specifically to the definition of risk free rate.
The risk-free rate is the interest rate: Multiple Choice 0 at which one would lend if...
Which of the following equations is NOT correct? Quoted rate = quota risk-free rate + default risk premium + liquidity premium + maturity risk premium Quoted interest rate minus real risk-free rate = Inflation premium Maturity risk premium + marketability premium = Nominal rate minus quoted risk-free rate Maturity risk premium + marketability premium + default risk premium = Nominal rate minus quoted risk-free rate You are the chief financial officer (CFO) of a regional bank in New Orleans. As you...
Which of the following would increase the risk of a loan to the lender? Multiple Choice Inflation rate greater than loan rate A short time to maturity o Consumer Price Index o o Rule of 72 Rule or 72 o Inflation rate lower than loan rate o
Which of the following is correct? A. The maturity premiums embedded in the interest rates on us treasury securities are due primarily to the fact that the probability default is lower on long term bonds than on short term goals. B. Reinvestment rate is lower, other things held constant, on long term in short term bonds. C. According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to slowe downward....
Wall Street” fulfills an important role for “main street”. It channels funds from savers to borrowers in the most effective way possible. However, its foundations are fragile by construction; for instance, banks borrow short term funds (including deposits) and lend for long terms investment projects. So they may become illiquid if too many deposits are withdrawn on a short notice. They are also exposed to other risks, such interest rate changes and the risk that loans are not repaid (credit...
Multiple choice question QUESTION 4 Which of the following statements does describe the "cash rate" most accurately? The cash rate is the interest rate that the RBA charges banks for unsecured overnight loans. The cash rate is the interest rate that banks charge each other for unsecured overnight loans The cash rate is the interest rate that the RBA charges banks for secured overnight loans. The cash rate is the interest rate that banks charge each other for secured overnight...
10a. If the expected default rate on a credit card is 8.5% and the risk-free rate is 3.25%, what interest rate must a financial institution charge on the credit card in order for its expected return to equal the risk-free rate? If the financial institution assumes a 0% recovery rate in the event of default, what interest rate will the financial institution charge? b. If the expected default rate on a 1-year home equity loan is 2.5% and the financial...
Which of the following is correct? A. The maturity premiums embedded in the interest rates on us treasury securities are due primarily to the fact that the probability of default is lower on long-term bonds than on short-term goals. B. If the maturity risk premium were zero and the rate of inflation were expected to increase in the future, then the yield curve for us treasurt securities would, other things held constant, have an upward slope. C. According to the...
The rate of return on which type of security is normally used as the risk-free rate of return? Multiple Choice Long-term Treasury bonds Treasury bills Intermediate-term Treasury bonds oooo Long-term corporate bonds Intermediate-term corporate bonds
Suppose the risk-free interest rate is 4.8% a. Having 5600 today is equivalent to having what amount in one year? b. Having 5600 in one year is equivalent to having what amount today? c. Which would you prefer, $600 today or $600 in one year? Does your answer depend on when you need the money? Why or why not? a. Having 5600 today is equivalent to having what amount in one year? Having 5600 today is equivalent to having $...
Which is a commonly used proxy for the "risk-free rate"? A The average historical interest rate on long-term government bonds B The current market rate interest rate on a government-insured savings account C The current yield to maturity on a long-term government bond D The rate of return on a low volatility stock