Exam 4: Future Value, Present Value and Interest Rates

You win your state lottery. The lottery officials offer you the following options: you can accept annual payments of $50,000 for 20 years or receive an upfront payment of $700,000. Ignoring issues like mortality tables, taxes, etc.; and assuming the first payment is made immediately, what market interest rate would make it more attractive to take the upfront payment?

What is the monthly interest rate if you are asked to convert a 12 percent annual rate to a monthly rate (calculate to 4 decimal places)?

If a bond has a face value of $1,000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of:

Explain why, if real interest rates are so important, we see most interest rates quoted in nominal terms.

A change in the interest rate:

Which of the following best expresses the present value of $500 that you have to wait four years and three months to receive?

What is the present value of $100 promised one year from now at 10% annual interest?

Explain why an investor cannot simply compare the size of promised payments from different investments, even if the interest rates and other risk factors are the same.

If a saver has a positive rate of time preference then the present value of $100 to be received 1 year from today is:

How might the behavior of professional investment managers prior to the financial crisis of 2007-2009 contributed to the depth of the plunge of corporate and mortgage security prices during the crisis?

The lower the interest rate, i, the:

Which of the following best expresses the proceeds a lender receives from a one-year simple loan when the annual interest rate equals i?

From the Fisher equation we see that the nominal interest rate and expected inflation have:

Explain why an increase in expected inflation will result in an increase in nominal interest rates, holding other factors constant.

During the early 1980s, the U.S. economy experienced an increase in interest rates quoted on U.S. Treasury debt, business loans, and mortgages. At the same time the inflation rate gradually declined more than expected. What happened to ex ante versus ex post real interest rates during this period? Use the Fisher equation to support your answer.

Suppose Mary receives an $8,000 loan from First National Bank. Mary repays $8,480 to First National Bank at the end of one year. Assuming the simple calculation of interest, the interest rate on Mary's loan was:

Briefly discuss the relationship between present value and each of the following: a) future value b) time c) interest rate

Explain why countries with high and volatile inflation rates are likely to have volatile nominal interest rates.

The value of $100 left in a certificate of deposit for four years that earns 4.5% annually will be:

The decimal equivalent of a basis point is: