Exam 3: Time Value of Money: an Introduction

Owen expects to receive $20 000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 7.5%, how much money can he borrow from the bank on the basis of this information?

How can we convert the value of money from one point in time to another?

Which of the following statements is INCORRECT?

If the exchange rates, after fees, in Tokyo are ¥1 000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following would you expect to occur?

'If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets.' What do we call the above statement?

You see on eBay that a used Xbox 360 sells for $100 and a new Xbox 360 sells for $300. Is this an arbitrage opportunity?

On Commodity Exchange A it is possible to buy and sell crude oil at $117 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $119 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 in five years' time. Steve concludes that in five years' time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?

Use the information for the question(s)below. As an oil refiner, you are able to produce $76.16 worth of unleaded petrol from one barrel of Tapis Outback Crude (TOC)oil. Because of its lower sulphur content, you can produce $77.25 worth of unleaded petrol from one barrel of Western Australian Intermediate (WAI)crude. -Another oil refiner is offering to trade you 10 150 tonnes of TOC crude oil for 10 000 tonnes of WAI crude oil. Assuming you just purchased 10 000 tonnes of WAI crude at the current market price, the total benefit (cost)to you if you take the trade is closest to:

Explain why a dollar today is worth more than a dollar tomorrow.

An investor has the opportunity to buy a $10 000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed?

The overarching principal that a financial manager should follow when making decisions is that decisions should increase the value of the firm to its investors.

Why should interest rates be generally positive?

Which of the following statements regarding arbitrage and security prices is INCORRECT?

Which of the following statements regarding the Law of One Price is INCORRECT?

Use the information for the question(s)below. As an oil refiner, you are able to produce $76.16 worth of unleaded petrol from one barrel of Tapis Outback Crude (TOC)oil. Because of its lower sulphur content, you can produce $77.25 worth of unleaded petrol from one barrel of Western Australian Intermediate (WAI)crude. -Another oil refiner is offering to trade you 10 150 tonnes of Tapis Outback Crude (TOC)oil for 10 000 tonnes of Western Australian Intermediate (WAI)crude oil. Assuming you currently have 10 000 tonnes of WAI crude, the added benefit (cost)to you if you take the trade is closest to:

On the day Harry was born, his parents put $1 000 into an investment account that promises to pay a fixed interest rate of 4% per year. How much money will Harry have in this account when he turns 18?

Dollar amounts received at different points in time cannot be compared in absolute terms.

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

What is the future value (FV)of $60 000 in five years, assuming the interest rate is 5% per year?