Question 1

An investment grows from $100.00 to $150.00 or 50% over five years.What annual increase gives a 50% increase over five years?

Accepted Answer

A) 12.00% 
B) 10.00% 
C) 9.25% 
D) 8.45% 
A) 12.00% 
B) 10.00% 
C) 9.25% 
D) 8.45%

Question 2

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

Accepted Answer

Since 1 basis point equals .01 percent,

Question 3

If a bond has a face value of $1,000 and the bondholder receives coupon payments of $27.50 semi-annually, the bond's coupon rate is:

Accepted Answer

A) 2.75% 
B) 5.50% 
C) 27.5% 
D) a value that cannot be determined from the information provided. 
A) 2.75% 
B) 5.50% 
C) 27.5% 
D) a value that cannot be determined from the information provided.

Question 4

The price of a coupon bond is determined by taking the present value of:

Accepted Answer

A) the bond's final payment and subtracting the coupon payments. 
B) the coupon payments and adding this to the face value. 
C) the bond's final payment. 
D) all of the bond's payments. 
A) the bond's final payment and subtracting the coupon payments. 
B) the coupon payments and adding this to the face value. 
C) the bond's final payment. 
D) all of the bond's payments.

Question 5

An investment carrying a current cost of $120,000 is going to generate $50,000 of revenue for each of the next three years.To calculate the internal rate of return we need to:

Accepted Answer

A) calculate the present value of each of the $50,000 payments and multiply these and set this equal to $120,000. 
B) find the interest rate at which the present value of $150,000 for three years from now equals $120,000. 
C) find the interest rate at which the sum of the present values of $50,000 for each of the next three years equals $120,000. 
D) subtract $120,000 from $150,000 and set this difference equal to the interest rate. 
A) calculate the present value of each of the $50,000 payments and multiply these and set this equal to $120,000. 
B) find the interest rate at which the present value of $150,000 for three years from now equals $120,000. 
C) find the interest rate at which the sum of the present values of $50,000 for each of the next three years equals $120,000. 
D) subtract $120,000 from $150,000 and set this difference equal to the interest rate.

Question 6

An investment has grown from $100.00 to $130.00 or by 30% over four years.What annual increase gives a 30% increase over four years?

Accepted Answer

A) 7.50% 
B) 6.30% 
C) 6.78% 
D) 7.24% 
A) 7.50% 
B) 6.30% 
C) 6.78% 
D) 7.24%

Question 7

Suppose that Ray Allen, a basketball player for the Miami Heat, will become a free agent at the end of this NBA season.Suppose that Allen is considering two possible contracts from different teams.Note that the salaries are paid at the end of EACH year.   The interest rate is 10%.Based on this information, which of the following is true?

Accepted Answer

A) Allen should take the Seattle contract because it has a higher present value. 
B) Allen should take the Portland contract because it has a higher present value. 
C) Allen is indifferent between the two contracts because they are both worth $12 million. 
D) Allen is indifferent between the two contracts because they are both worth $10.9 million. 
A) Allen should take the Seattle contract because it has a higher present value. 
B) Allen should take the Portland contract because it has a higher present value. 
C) Allen is indifferent between the two contracts because they are both worth $12 million. 
D) Allen is indifferent between the two contracts because they are both worth $10.9 million.

Question 8

The lower the interest rate, i, the:

Accepted Answer

A) lower is the present value. 
B) greater must be n. 
C) higher is the present value. 
D) higher is the future value. 
A) lower is the present value. 
B) greater must be n. 
C) higher is the present value. 
D) higher is the future value.

Question 9

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

Accepted Answer

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

Question 10

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?

Accepted Answer

A) $521.60 
B) $490.00 
C) $500.00 
D) $520.00 
A) $521.60 
B) $490.00 
C) $500.00 
D) $520.00

Question 11

Explain the suggestion that people may have their own "personal discount rate" and how that may affect decisions about borrowing and other financial matters.

Accepted Answer

A good illustration of this comes from t

Question 12

The internal rate of return of an investment is:

Accepted Answer

A) the same as return on investment. 
B) zero when the present value of an investment equals its cost. 
C) the interest rate that equates the present value of an investment with its cost. 
D) equal to the market rate of interest when an investment is made. 
A) the same as return on investment. 
B) zero when the present value of an investment equals its cost. 
C) the interest rate that equates the present value of an investment with its cost. 
D) equal to the market rate of interest when an investment is made.

Question 13

How has Islamic banking redefined lending to deal with Islam's prohibition of usury?

Accepted Answer

Islamic banking has found alternative me

Question 14

Consider a bond that costs $1000 today and promises a one-time future payment of $1080 in four years.What is the approximate interest rate on this bond?

Accepted Answer

A) 2% 
B) 4% 
C) 8% 
D) 10.8% 
A) 2% 
B) 4% 
C) 8% 
D) 10.8%

Question 15

Interest rates that are adjusted for expected inflation are known as:

Accepted Answer

A) coupon rates. 
B) ex ante real interest rates. 
C) ex post real interest rates. 
D) nominal interest rates. 
A) coupon rates. 
B) ex ante real interest rates. 
C) ex post real interest rates. 
D) nominal interest rates.

Question 16

Compound interest means that:

Accepted Answer

A) you get an interest deduction for paying your loan off early. 
B) you get interest on interest. 
C) you get an interest deduction if you take out a loan for longer than one year. 
D) interest rates will rise on larger loans. 
A) you get an interest deduction for paying your loan off early. 
B) you get interest on interest. 
C) you get an interest deduction if you take out a loan for longer than one year. 
D) interest rates will rise on larger loans.

Question 17

Suppose the nominal interest rate on a one-year car loan is 8% and the inflation rate is expected to be 3% over the next year.Based on this information, we know:

Accepted Answer

A) the ex ante real interest rate is 5%. 
B) the lender benefits more than the borrower because of the difference in the nominal versus real interest rates. 
C) at the end of the year, the borrower pays only 5% in nominal interest. 
D) the ex post real interest rate 11%. 
A) the ex ante real interest rate is 5%. 
B) the lender benefits more than the borrower because of the difference in the nominal versus real interest rates. 
C) at the end of the year, the borrower pays only 5% in nominal interest. 
D) the ex post real interest rate 11%.

Question 18

Suppose Paul borrows $4,000 for one year from his grandfather who charges Paul 7% interest.At the end of the year Paul will have to repay his grandfather:

Accepted Answer

A) $4,280 
B) $4,290 
C) $4,350 
D) $4,820 
A) $4,280 
B) $4,290 
C) $4,350 
D) $4,820

Question 19

What matters more: having a credit card with a low rate or paying off your balance as quickly as possible? Explain.

Accepted Answer

Whatever the rate of interest on your cr

Question 20

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

Accepted Answer

A) $120.00 
B) $119.25 
C) $117.00 
D) $145.00 
A) $120.00 
B) $119.25 
C) $117.00 
D) $145.00

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

An investment grows from $100.00 to $150.00 or 50% over five years.What annual increase gives a 50% increase over five years?

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

If a bond has a face value of $1,000 and the bondholder receives coupon payments of $27.50 semi-annually, the bond's coupon rate is:

The price of a coupon bond is determined by taking the present value of:

An investment carrying a current cost of $120,000 is going to generate $50,000 of revenue for each of the next three years.To calculate the internal rate of return we need to:

An investment has grown from $100.00 to $130.00 or by 30% over four years.What annual increase gives a 30% increase over four years?

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?

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?

Explain the suggestion that people may have their own "personal discount rate" and how that may affect decisions about borrowing and other financial matters.

The internal rate of return of an investment is:

How has Islamic banking redefined lending to deal with Islam's prohibition of usury?

Consider a bond that costs $1000 today and promises a one-time future payment of $1080 in four years.What is the approximate interest rate on this bond?

Interest rates that are adjusted for expected inflation are known as:

Compound interest means that:

Suppose the nominal interest rate on a one-year car loan is 8% and the inflation rate is expected to be 3% over the next year.Based on this information, we know:

Suppose Paul borrows $4,000 for one year from his grandfather who charges Paul 7% interest.At the end of the year Paul will have to repay his grandfather:

What matters more: having a credit card with a low rate or paying off your balance as quickly as possible? Explain.

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

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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