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    Economy and Risk

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    6. Which of the following would be most likely to lead to a higher level of interest rates in the economy?

    a) Households start saving a larger percentage of their income.

    b) Corporations step up their expansion plans and thus increase their demand for capital.

    c) The level of inflation begins to decline.

    d) The economy moves from a boom to a recession.

    e) The Federal Reserve decides to try to stimulate the economy.

    7. Assume that interest rates on 20-year Treasury and corporate bonds are as follows:

    T-bond = 7.72% A = 9.64%

    AAA = 8.72% BBB = 10.18%

    The differences in rates among these issues were caused primarily by

    a) Tax effects.

    b) Default risk differences.

    c) Maturity risk differences.

    d) Inflation differences.

    e) Real risk-free rate differences

    8. Describe the three different forms of market efficiency.

    9. Which fluctuate more, long-term or short-term interest rates? Why?

    10. Suppose interest rates on Treasury bonds rose from 5 to 9 percent as a result of higher interest rates in Europe. What effect would this have on the price of an average company's common stock?

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    6. d) The economy moves from a boom to a recession.

    7. b) Default risk differences.

    8. There are three form of the efficient market hypothesis:

    (i) Weak form efficiency: This indicates that the asset price must indicate ...

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