Interested in Interest Rates?

After falling to historic lows during the recession, interest rates have been rising. Try this short quiz to test your interest rate knowledge.

1. Which of the following interest rates is directly controlled by the Federal Reserve's Federal Open Market Committee?

     A) Prime rate D) All of the above
     B) Federal funds rate E) None of the above
     C) Mortgage rates  

 

2. The Federal Reserve typically ________ interest rates to control inflation and ________ rates to help accelerate economic growth.

     A) raises / lowers B) lowers / raises 

 

3. The stock market tends to applaud higher interest rates.

     A) True  B) False   

 

4. When interest rates rise, the value of _______ bonds generally decreases.

     A) municipal D) existing      
     B) Treasury E) new
     C) corporate  

 

5. The longer a bond's maturity date, the _______ sensitive its value is to fluctuations in interest rates.

     A) more B) less      

The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

IMAGE

Answers

1.   B) Federal funds rate. This is the rate that Federal Reserve banks charge each other for overnight loans within the Federal Reserve system. It typically affects other interest rates, including the prime rate and adjustable mortgage rates, but the Fed does not directly control those rates.

2.   A) raises/lowers. Raising rates theoretically slows economic activity, which helps to dampen inflation. Inflation remained slightly below the Fed's 2% target rate through March 2017, so it seems that recent rate hikes are aimed at returning interest rates to a more typical historical range while guarding against future inflation.1 The Fed dropped rates to historic lows in 2008 to stimulate the slow economy.

3.   B) False. Higher borrowing costs can reduce corporate profits and reduce the amount of income consumers have available for spending. However, even with higher rates, an improving economy could be good for companies, consumers, and investors in the long term.

4.   D) existing. Because investors can buy new bonds with higher rates, existing bonds typically lose value.

5.   A) more. Generally, the further out the maturity date, the greater the potential for events to occur that have a positive or negative effect on a bond's value.

 

Information provided has been prepared from Emerald Connect, Inc. sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. Emerald Connect, Inc. is not an affiliate of AXA Advisors, LLC. Please consult your tax and legal advisors regarding your individual situation. Neither AXA Advisors nor any of the data provided by AXA Advisors or its content providers, such as Emerald Connect, Inc., shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the AXA Advisors website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through AXA Network, LLC and its subsidiaries.