Question 1

If the internal rate of return from an investment is more than the opportunity cost of funds the firm should:

Accepted Answer

A) make the investment. 
B) not make the investment. 
C) only make the investment using retained earnings. 
D) only make part of the investment and wait to see if interest rates decrease. 
A) make the investment. 
B) not make the investment. 
C) only make the investment using retained earnings. 
D) only make part of the investment and wait to see if interest rates decrease.

Question 2

What is the present value of $200 promised two years from now at 5% annual interest?

Accepted Answer

A) $190.00 
B) $220.00 
C) $180.00 
D) $181.41 
A) $190.00 
B) $220.00 
C) $180.00 
D) $181.41

Question 3

Which investment plan will provide the highest future value: $500 invested at 5 percent annually for four years and then that balance invested at 7 percent annually for an additional three years, or $500 invested at 6 percent annually for seven years?

Accepted Answer

$500 invested for four years at 5 percen

Question 4

Using the rule of 72, determine the approximate time it will take $1000 to double given the following interest rates.
a) 5.5%
b) 10.0%
c) 30.0%
d) 2.0%
e) 4.5%

Accepted Answer

Since the rule of 72 says if we take 72/

Question 5

A coupon bond is a bond that:

Accepted Answer

A) always sells at a price that is less than the face value. 
B) provides the owner with regular payments. 
C) pays the owner the sum of the coupons at the bond's maturity. 
D) pays a variable coupon rate depending on the bond's price. 
A) always sells at a price that is less than the face value. 
B) provides the owner with regular payments. 
C) pays the owner the sum of the coupons at the bond's maturity. 
D) pays a variable coupon rate depending on the bond's price.

Question 6

Which of the following best expresses the payment a saver receives for investing their money for two years?

Accepted Answer

A) PV + PV 
B) PV + PV(1 + i) 
C) PV(1 + i)2 
D) 2PV(1 + i) 
A) PV + PV 
B) PV + PV(1 + i) 
C) PV(1 + i)2 
D) 2PV(1 + i)

Question 7

The coupon rate for a coupon bond is equal to the:

Accepted Answer

A) annual coupon payment divided by the face value of the bond. 
B) annual coupon payment divided by the purchase price of the bond. 
C) purchase price of the bond divided by the coupon payment. 
D) annual coupon payment divided by the selling price of the bond. 
A) annual coupon payment divided by the face value of the bond. 
B) annual coupon payment divided by the purchase price of the bond. 
C) purchase price of the bond divided by the coupon payment. 
D) annual coupon payment divided by the selling price of the bond.

Question 8

What is the future value of $1,000 after six months earning 12% annually?

Accepted Answer

A) $1,050.00 
B) $1,060.00 
C) $1,120.00 
D) $1,058.30 
A) $1,050.00 
B) $1,060.00 
C) $1,120.00 
D) $1,058.30

Question 9

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

Accepted Answer

A) an inverse relationship. 
B) a relationship which is direct but less than one-to-one. 
C) a relationship which is direct and one-to-one. 
D) no relationship. 
A) an inverse relationship. 
B) a relationship which is direct but less than one-to-one. 
C) a relationship which is direct and one-to-one. 
D) no relationship.

Question 10

If the interest rate is zero, a promise to receive a $100 payment one year from now is:

Accepted Answer

A) more valuable than receiving $100 today. 
B) less valuable than receiving $100 today. 
C) equal in value to receiving $100 today. 
D) equal in value to receiving $101 today. 
A) more valuable than receiving $100 today. 
B) less valuable than receiving $100 today. 
C) equal in value to receiving $100 today. 
D) equal in value to receiving $101 today.

Question 11

The future value of $100 that earns 10% annually for n years is best expressed by which of the following?

Accepted Answer

A) $100(0.1)n 
B) $100 × n × (1.1) 
C) $100(1.1)n 
D) $100/(1.1)n 
A) $100(0.1)n 
B) $100 × n × (1.1) 
C) $100(1.1)n 
D) $100/(1.1)n

Question 12

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

Accepted Answer

Consider a lender who loans $100 for a y

Question 13

At any fixed interest rate, an increase in time, n, until a payment is made:

Accepted Answer

A) increases the present value. 
B) has no impact on the present value since the interest rate is fixed. 
C) reduces the present value. 
D) affects only the future value. 
A) increases the present value. 
B) has no impact on the present value since the interest rate is fixed. 
C) reduces the present value. 
D) affects only the future value.

Question 14

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.What amount is Mary depositing?

Accepted Answer

A) $520.00 
B) $514.50 
C) $500.00 
D) $512.40 
A) $520.00 
B) $514.50 
C) $500.00 
D) $512.40

Question 15

What is the present value of $500 promised four years from now at 5% annual interest?

Accepted Answer

A) $411.35 
B) $400.00 
C) $607.75 
D) $520.00 
A) $411.35 
B) $400.00 
C) $607.75 
D) $520.00

Question 16

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:

Accepted Answer

A) is at least 7%. 
B) is anything above 0%. 
C) equals the real rate desired plus expected inflation. 
D) equals the real rate desired less expected inflation. 
A) is at least 7%. 
B) is anything above 0%. 
C) equals the real rate desired plus expected inflation. 
D) equals the real rate desired less expected inflation.

Question 17

As inflation increases, for any fixed nominal interest rate, the real interest rate:

Accepted Answer

A) also increases. 
B) remains the same, that's why it is real. 
C) decreases. 
D) decreases by less than the increase in inflation. 
A) also increases. 
B) remains the same, that's why it is real. 
C) decreases. 
D) decreases by less than the increase in inflation.

Question 18

Which of the following best expresses the future value of $100 left in a savings account earning 3.5% for three and a half years?

Accepted Answer

A) $100(1.035)3.5 
B) $100(0.35)3.5 
C) $100 × 3.5 × (1.035) 
D) $100(1.035)3/2 
A) $100(1.035)3.5 
B) $100(0.35)3.5 
C) $100 × 3.5 × (1.035) 
D) $100(1.035)3/2

Question 19

Doubling the future value will cause:

Accepted Answer

A) the present value to fall by half. 
B) the interest rate i, to double. 
C) no change to present value, only the interest rate. 
D) the present value to double. 
A) the present value to fall by half. 
B) the interest rate i, to double. 
C) no change to present value, only the interest rate. 
D) the present value to double.

Question 20

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

Accepted Answer

A) i = r - πe 
B) r = i + πe 
C) r = i - πe 
D) πe = i + r 
A) i = r - πe 
B) r = i + πe 
C) r = i - πe 
D) πe = i + r

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

If the internal rate of return from an investment is more than the opportunity cost of funds the firm should:

What is the present value of $200 promised two years from now at 5% annual interest?

Which investment plan will provide the highest future value: $500 invested at 5 percent annually for four years and then that balance invested at 7 percent annually for an additional three years, or $500 invested at 6 percent annually for seven years?

Using the rule of 72, determine the approximate time it will take $1000 to double given the following interest rates. a) 5.5% b) 10.0% c) 30.0% d) 2.0% e) 4.5%

A coupon bond is a bond that:

Which of the following best expresses the payment a saver receives for investing their money for two years?

The coupon rate for a coupon bond is equal to the:

What is the future value of $1,000 after six months earning 12% annually?

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

If the interest rate is zero, a promise to receive a $100 payment one year from now is:

The future value of $100 that earns 10% annually for n years is best expressed by which of the following?

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

At any fixed interest rate, an increase in time, n, until a payment is made:

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.What amount is Mary depositing?

What is the present value of $500 promised four years from now at 5% annual interest?

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:

As inflation increases, for any fixed nominal interest rate, the real interest rate:

Which of the following best expresses the future value of $100 left in a savings account earning 3.5% for three and a half years?

Doubling the future value will cause:

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

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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