Question 1

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

Accepted Answer

Holding time and interest rate constant, any percentage change in the future value will cause the same percentage change in the present value.Holding the future value and the interest rate constant, and increase in the time until payment reduces the present value and any decrease in time increases the present value.Holding future value and time constant, an increase in the interest rate reduces the present value and a decrease in the interest rate increases the present value.

Question 2

The higher the future value of the payment the:

Accepted Answer

A) lower the present value. 
B) higher the present value. 
C) future value doesn't impact the present value, only the interest rate really matters. 
D) lower the present value because the interest rate must fall. 
A) lower the present value. 
B) higher the present value. 
C) future value doesn't impact the present value, only the interest rate really matters. 
D) lower the present value because the interest rate must fall. B

Question 3

Which of the following expresses 5.65%?

Accepted Answer

A) 0.565 
B) 0.00565 
C) 5.65 
D) 0.0565 
A) 0.565 
B) 0.00565 
C) 5.65 
D) 0.0565 D

Question 4

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?

Accepted Answer

A) $151.75 
B) $150.00 
C) $148.75 
D) $147.50 
A) $151.75 
B) $150.00 
C) $148.75 
D) $147.50

Question 5

You are considering purchasing a home.You find one that you like but you realize that you will need to obtain a mortgage for $100,000.The mortgage company presents you with two options: a 15-year mortgage at a 6.0% annual rate and a 30-year mortgage at a 6.5% annual rate.What will be the fixed annual payment for each mortgage?

Accepted Answer

Using a financial calculator or a spread

Question 6

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

Accepted Answer

A) more than $100. 
B) not calculable. 
C) less than 100. 
D) unknown to the saver. 
A) more than $100. 
B) not calculable. 
C) less than 100. 
D) unknown to the saver.

Question 7

Usually an investment will be profitable if:

Accepted Answer

A) the internal rate of return is less than the cost of borrowing. 
B) the cost of borrowing is equal to the internal rate of return. 
C) it is financed with retained earnings. 
D) the cost of borrowing is less than the internal rate of return. 
A) the internal rate of return is less than the cost of borrowing. 
B) the cost of borrowing is equal to the internal rate of return. 
C) it is financed with retained earnings. 
D) the cost of borrowing is less than the internal rate of return.

Question 8

Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.

Accepted Answer

We can use a calculator and the formula

Question 9

The decimal equivalent of a basis point is:

Accepted Answer

A) 0.0001 
B) 1.00 
C) 0.001 
D) 0.01 
A) 0.0001 
B) 1.00 
C) 0.001 
D) 0.01

Question 10

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

Accepted Answer

A) ($500/4.25) × (1 + i) 
B) $500 × 4.25 × (1 + i) 
C) $500/(1 + i)4.25 
D) ($500/4) × (1 + i)3 
A) ($500/4.25) × (1 + i) 
B) $500 × 4.25 × (1 + i) 
C) $500/(1 + i)4.25 
D) ($500/4) × (1 + i)3

Question 11

A promise of a $100 payment to be received one year from today is:

Accepted Answer

A) more valuable than receiving the payment today. 
B) less valuable than receiving the payment two years from now. 
C) equally valuable as a payment received today if the interest rate is zero. 
D) not enough information is provided to answer the question. 
A) more valuable than receiving the payment today. 
B) less valuable than receiving the payment two years from now. 
C) equally valuable as a payment received today if the interest rate is zero. 
D) not enough information is provided to answer the question.

Question 12

If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of:

Accepted Answer

A) $425.00 
B) $4.25 
C) $42.50 
D) a value that cannot be determined from the information provided. 
A) $425.00 
B) $4.25 
C) $42.50 
D) a value that cannot be determined from the information provided.

Question 13

Which of the following best expresses the payment a lender receives for lending money for three years?

Accepted Answer

A) 3PV 
B) PV(1 + i)3 
C) PV/(1 + i)3 
D) FV/(1 + i)3 
A) 3PV 
B) PV(1 + i)3 
C) PV/(1 + i)3 
D) FV/(1 + i)3

Question 14

If a borrower and a lender agree on a long-term loan at a nominal interest rate that is fixed over the duration of the loan, how will a higher-than-expected rate of inflation impact the parties if at all?

Accepted Answer

A higher-than-expected rate of inflation

Question 15

What will be the amount owed at the end of one year if a borrower charges $100 on his/her credit card and doesn't make any payments during the year (assume the interest rate is 1.5% per month)?

Accepted Answer

$119.56.While it is tempting to multiply

Question 16

The future value of $100 at a 5% per year interest rate at the end of one year is:

Accepted Answer

A) $95.00 
B) $105.00 
C) $97.50 
D) 107.50 
A) $95.00 
B) $105.00 
C) $97.50 
D) 107.50

Question 17

A bond offers a $40 coupon, has a face value of $1000, and 10 years to maturity.If the interest rate is 5.0%, what is the value of this bond?

Accepted Answer

Realizing that the price of the bond is

Question 18

Calculate the internal rate of return for a machine that costs $500,000 and provides annual revenue of $115,000 per year for 5 years.You can assume all revenue is received once a year at the end of the year.

Accepted Answer

To solve this we equate the cost of the

Question 19

Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

Accepted Answer

To simply multiply $100 by 1.1

Question 20

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

Accepted Answer

You could argue that volatile inflation

Exam 4: Future Value, Present Value, and Interest Rates

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

The higher the future value of the payment the:

Which of the following expresses 5.65%?

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?

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

Usually an investment will be profitable if:

Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.

The decimal equivalent of a basis point is:

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

A promise of a $100 payment to be received one year from today is:

If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of:

Which of the following best expresses the payment a lender receives for lending money for three years?

If a borrower and a lender agree on a long-term loan at a nominal interest rate that is fixed over the duration of the loan, how will a higher-than-expected rate of inflation impact the parties if at all?

What will be the amount owed at the end of one year if a borrower charges $100 on his/her credit card and doesn't make any payments during the year (assume the interest rate is 1.5% per month)?

The future value of $100 at a 5% per year interest rate at the end of one year is:

A bond offers a $40 coupon, has a face value of $1000, and 10 years to maturity.If the interest rate is 5.0%, what is the value of this bond?

Calculate the internal rate of return for a machine that costs $500,000 and provides annual revenue of $115,000 per year for 5 years.You can assume all revenue is received once a year at the end of the year.

Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

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

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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