The Relationship Between Nominal Interest Rates on Default-Free, Pure Discount

question 355

Multiple Choice

The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:

• A) Liquidity effect.
• B) Fisher effect.
• C) Term structure of interest rates.
• D) Inflation premium.
• E) Interest rate risk premium.

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Definitions:

Mutually Exclusive

Projects that cannot be performed at the same time. A company could choose either Project 1 or Project 2, or it can reject both, but it cannot accept both projects.

IRR

Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. It is used to evaluate the attractiveness of an investment or project.

Hard Capital Rationing

Hard capital rationing involves a situation where a company cannot access additional funds for investments at any cost due to external factors, such as market conditions or regulatory limits.

Discounted Payback

A capital budgeting method that calculates the time it takes to recoup an investment's initial costs, taking the time value of money into account.