1. If a project costs $100 and pays $107 next year, the maximum interest rate at which the present value of the investment exceeds its cost is _________________.
2. As real interest rates rise, investment spending in the economy _______.
3. Corporate bonds, retained earnings, and tax deductions are the three sources of funds that firms have for investments. _______ (True/False)
4. The Q-theory of investment was developed by _______.
5. The price of a stock can be thought of as the present value of future _______.
6. Low Interest Rates but No Takers. In 2010, interest rates on home mortgages were in the neighborhood of 5 percent very low by historical standards but many individuals did not wish to buy homes. Using the concept of the real interest rate, can you explain why low interest rates did not entice new buyers?
7. The Implications of Zero Real Interest Rates. If the real interest rate were zero, it would be a financially sound decision to level the Rocky Mountains so that automobiles and cars would save on gas mileage. Putting aside ecological concerns, why is this statement true?
8. Hydroelectric Dams. Hydroelectric dams are very costly to build and construct, but there are considerable savings in operating costs compared to other energy alternatives. Explain why hydroelectric dams are more likely to be profitable when interest rates are low.
9. Stock Prices, Interest Rates, and Corporate Earnings. Holding other factors constant, explain why stock prices tend to rise when
a. Interest rates fall.
b. Expected corporate earnings rise.