Based on Our Understanding of the Determinants of the Interest

question 60

Multiple Choice

Based on our understanding of the determinants of the interest rate and bond prices, we know that a decrease in income will cause:

• A) A decrease in bond prices and an increase in i.
• B) An increase in bond prices and an increase in the interest rate (i).
• C) No change in bond prices and a decrease in i.
• D) An increase in bond prices and a decrease in i.
• E) A decrease in bond prices and a decrease in i.

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Definitions:

Initial Investments

The sum of money used to start a business venture, purchase capital assets, or invest in a project.

Income Taxes

Government levies on the earnings of individuals and companies within their territory.

After-Tax Discount Rate

The discount rate used in investment or project valuation that accounts for the effects of taxes on the project's cash flows.

Straight-Line Depreciation

A method of allocating an asset's cost evenly over its useful life.