Exam 4: Future Value, Present Value and Interest Rates

Compute the interest rate for a $1,000 face value a bond that sells for $280 and matures in 20 years. The bond has no coupon payments, only the face value payment.

Compounding refers to the

Suppose a two-year coupon bond has payments of $40 and a face value of $800. The interest rate is 8%. Compute the present value of the coupon payments and the principal payment of the bond. What is the price of this bond?

The "coupon rate" is:

Doubling the future value will cause the:

Convert each of the following basis points amounts to percents: a) 412.5 b) 10 c) 125.7 d) 1075 e) 1

Compound interest means that:

If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that:

Which formula below best expresses the real interest rate, (r)?

Suppose Tom receives a one-year loan from ABC Bank for $5,000.00. At the end of the year, Tom repays $5,400.00 to ABC Bank. Assuming the simple calculation of interest, the interest rate on Tom's loan was:

Suppose that you have a winning lottery ticket for $100,000. The State of California doesn't pay this amount up front - this is the amount you will receive over time. The State offers you two options. The first pays you $80,000 up front and that will be the entire amount. The second pays you winnings over a three year period. The last option pays you a large payment today with small payments in the future. The payment options are detailed in the table below: Compute the present value of each payment option, assuming the interest rate is 12%. Now, compute the present values based on an interest rate of 5%. Compare your answers, explaining why they are different when the interest rate changes. When the interest rate is 5%, the present values are as follows:

Historically, many cultural groups have outlawed usury, or the practice of levying interest on loans. Some groups oppose usury because it exacerbates problems of income inequality (as wealthier individuals can afford to lend to poorer individuals), while others claim investment and loans should be made charitably. Evaluate these arguments against usury based on your knowledge of present value. Do such prohibitions make sense?

Explain why the Fisher equation is not highly accurate at high rates of inflation. Use an example.

Mary deposits funds into a CD at her bank. The CD has an annual interest of 4.0%. If Mary leaves the funds in the CD for two years she will have $540.80. Assuming no penalties for withdrawing the funds early, what amount would Mary have at the end of one year?

Higher savings usually requires higher interest rates because:

Tom deposits funds in his savings account at the bank which is paying 3.5% interest. If he keeps his funds in the bank for one year he will have $155.25. What amount is Tom depositing?

Usually an investment will be profitable if:

Which of the following statements is most correct?