The Fed's Goal of Interest Rate Stability

question 53

Multiple Choice

The Fed's goal of interest rate stability

• A)was formally abandoned in 1998.
• B)is motivated by political pressure as well as by a desire for a stable saving and investment environment.
• C)is undermined by actions the Fed takes to further its goal of stability in financial markets and institutions.
• D)is undermined by actions the Fed takes to further its goal of price stability.

Understand the concept of an annual interest tax shield and how to calculate it.

Calculate earnings per share at break-even level of earnings before interest and taxes in different capital structures.

Identify break-even EBIT under various capital structures.

Understand the effect of adding financial leverage on a firm's value.

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Definitions:

Forward Rate

An agreed-upon price for a financial transaction that will occur at a future date.

Zero-Coupon Bonds

Debt securities that are sold at a deep discount and do not pay periodic interest payments, but instead are redeemed at their face value at maturity.

Yields to Maturity

The total return anticipated on a bond if it is held until it matures, considering all interest payments and the principal repayment.

Yield to Maturity

The total return anticipated on a bond if the bond is held until it matures, considering both the interest payments received and any gain or loss if the bond is purchased at a discount or premium.