Assume That Changes in Interest Rates Reflect Mainly Changes in the Rate

question 15

Multiple Choice

Assume that changes in interest rates reflect mainly changes in the rate of inflation.If a firm's unlevered cash flows:

• A)don't change with the rate of inflation,then the firm will want its liabilities to be exposed to interest rate risk.
• B)increase with the rate of inflation,then the firm will want its liabilities to be exposed to interest rate risk.
• C)decrease with the rate of inflation,then the firm will want its liabilities to be exposed to interest rate risk.
• D)increase with the real interest rate,then the firm will want its liabilities to be less exposed to interest rate risk.

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Definitions:

Demand Rises

An increase in the quantity of a good or service that consumers are willing and able to purchase at a given price.

Income Falls

A scenario where an individual or household experiences a reduction in their earnings from wages, investments, or other sources.

Equilibrium Price

The selling price where the amount of products supplied equals the amount of products demanded.

Equilibrium Quantity

The amount of goods or services supplied is exactly equal to the amount of goods or services demanded at a given price.