Deck 15: Trade-Offs Involving Time and Risk

Question 1

Scenario: George deposits $1,000 in a bank for a period of 1 year. After 1 year, he receives $1,300.
Refer to the scenario above.The time value of the amount deposited is ________.

A) $300
B) $1,000
C) $1,300
D) $2,300

Answer 1

$300

Question 2

The transfer of resources through time by economic agents is referred to as a ________ transformation.

A) clockwise
B) time-wise
C) chronological
D) intertemporal

Answer 2

intertemporal

Question 3

When economists expect that a reward might not occur,they incorporate the uncertainty by multiplying the reward by a ________.

A) positive factor greater than 1
B) positive factor less than 1
C) negative factor greater than ‒1
D) negative factor less than ‒1

Answer 3

positive factor less than 1

Question 4

When economists say that an interest rate is compounding,they imply that ________.

A) the rate of interest is decreasing every year
B) the rate of interest is increasing every year
C) interest is being earned on a deposit
D) the interest payment is doubling every two years

Question 5

Scenario: George deposits $1,000 in a bank for a period of 1 year. After 1 year, he receives $1,300.
Refer to the scenario above.The future value of the initial deposit after 1 year is ________.

A) $300
B) $1,000
C) $1,300
D) $2,300

Question 6

Scenario: Jenny deposits $3,000 in a bank for a period of 1 year at an annual rate of interest of 10 percent.
Refer to the scenario above.After a year,the bank will pay interest of ________.

A) $10
B) $300
C) $3,000
D) $3,300

Question 7

Scenario: Jenny deposits $3,000 in a bank for a period of 1 year at an annual rate of interest of 10 percent.
Refer to the scenario above.The principal in this case is ________.

A) $10
B) $300
C) $3,000
D) $3,300

Question 8

An individual deposits a certain amount of money in a bank.The amount deposited is referred to as ________.

A) interest
B) principal
C) installment
D) the time value of money

Question 9

The ________ is referred to as future value.

A) product of interest payments and principal
B) ratio of interest payments to principal
C) ratio of principal to interest payments
D) sum of interest payments and principal

Question 10

The time value of money is also referred to as ________.

A) a loan
B) interest
C) a collateral
D) principal

Question 11

Kevin deposits a certain sum in a bank at an annual compound rate of interest for 2 years.Interest in the second year will be calculated on ________.

A) the principal amount only
B) the amount in the account after 1 year
C) the sum of the principal amount and the amount in the account after 1 year
D) the difference between the principal amount and the amount in the account after 1 year

Question 12

John deposits $800 in a bank at an annual interest rate of 6 percent.The total amount in John's account after 1 year will be ________.

A) $822
B) $848
C) $864
D) $950

Question 13

Scenario: George deposits $1,000 in a bank for a period of 1 year. After 1 year, he receives $1,300.
Refer to the scenario above.The interest earned on the sum deposited is ________.

A) $300
B) $1,000
C) $1,300
D) $2,300

Question 14

Scenario: George deposits $1,000 in a bank for a period of 1 year. After 1 year, he receives $1,300.
Refer to the scenario above.The principal in this case is ________.

A) $300
B) $1,000
C) $1,300
D) $2,300

Question 15

To an economist,risky options ________.

A) are always bad options
B) are always good options
C) have costs and benefits that are fixed in advance
D) do not have costs and benefits that are fixed in advance

Question 16

When economists value rewards that will be experienced in the future,they multiply the reward by a ________.

A) positive factor greater than 1
B) positive factor less than 1
C) negative factor greater than ‒1
D) negative factor less than ‒1

Question 17

Which of the following statements is true?

A) Future rewards are worth less than current rewards of the same value.
B) Current rewards are worth less than future rewards of the same value.
C) Risky options are always preferred to riskless options.
D) Riskless options always have higher expected payoffs than risky options.

Question 18

The payment made by a bank to a depositor to use her money to make loans is referred to as ________.

A) dividend
B) interest
C) principal
D) stock

Question 19

________ is the payment received for temporarily giving up the use of money.

A) A loan
B) Principal
C) Interest
D) A collateral

Question 20

Ryan deposits $900 in a bank at an annual interest rate of 9 percent.The total amount in Ryan's account after one year will be ________.

A) $963
B) $975
C) $981
D) $999

Question 21

The future value of a sum of money deposited in a bank will be higher if ________.

A) the rate of interest is low
B) the rate of inflation is low
C) the returns on other assets are low
D) the money is kept in the bank for a longer period of time

Question 22

Scenario: Trinity deposits $8,000 in a bank at an interest rate of 8 percent per year compounded annually.
Refer to the scenario above.What will be the future value of the deposit after 1 year?

A) $8,420
B) $8,480
C) $8,640
D) $8,820

Question 23

The equation that calculates the future value of an investment with the interest rate and leaves all interest payments in the account until the final withdrawal is referred to as the ________ equation.

A) simple interest
B) present value
C) compound interest
D) exponential interest

Question 24

Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent.
Refer to the scenario above.What will be the difference between the future values of John's deposit and Wendy's deposit after 3 years?

A) $56.04
B) $112.26
C) $208.03
D) $439.15

Question 25

Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent.
Refer to the scenario above.What will be the future value of Wendy's deposit after 1 year?

A) $2,110
B) $2,120
C) $2,360
D) $2,400

Question 26

Scenario: Suppose you deposit $520 in a bank for a period of 1 year. The interest rate offered by the bank is 10 percent per year.
Refer to the scenario above.The total value in your account at the end of a year is equal to ________.

A) $520
B) $525
C) $550.50
D) $572

Question 27

Which of the following statements is true?

A) The lower the risk in an investment, the higher the expected return will be.
B) The higher the risk in an investment, the higher the expected return will be.
C) The higher the principal amount of an investment, the lower will be the rate of interest offered on the investment.
D) The higher the principal amount of an investment, the higher will be the rate of interest offered on the investment.

Question 28

Scenario: Suppose you deposit $520 in a bank for a period of 1 year. The interest rate offered by the bank is 10 percent per year.
Refer to the scenario above.The interest that you will earn after a year is equal to ________.

A) $10
B) $30
C) $32.24
D) $52

Question 29

If an individual deposits an amount at a compound interest rate of r percent per year for a time period of T years,then: ________.

A) Future value = (1 − r)ᵀ × (Principal)
B) Future value = (1 + r)/T × (Principal)
C) Future value = (1 ‒ r)/T × (Principal)
D) Future value = (1 + r)ᵀ × (Principal)

Question 30

If an individual receives $10,000 after 2 years by investing $10,000 today,we can conclude that ________.

A) the rate of inflation is zero
B) the market rate of interest is zero
C) the rate of inflation is negative
D) the market rate of interest is negative

Question 31

Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent.
Refer to the scenario above.What will be the future value of Wendy's deposit after 3 years?

A) $2,150.91
B) $2,278.64
C) $2,382.03
D) $2,764.12

Question 32

Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent.
Refer to the scenario above.What will be the future value of John's deposit after 3 years?

A) $2,590.06
B) $2,660.32
C) $2,708.08
D) $2,990.54

Question 33

Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent.
Refer to the scenario above.What will be the future value of John's deposit after 1 year?

A) $2,120
B) $2,180
C) $2,320
D) $2,460

Question 34

Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent.
Refer to the scenario above.What will be the difference between the future values of John's deposit and Wendy's deposit after 1 year?

A) $10
B) $40
C) $60
D) $100

Question 35

Scenario: Suppose you deposit $520 in a bank for a period of 1 year. The interest rate offered by the bank is 10 percent per year.
Refer to the scenario above.Suppose the interest rate is 5 percent.In this case,you will have ________ in your account after 1 year.

A) $533
B) $546
C) $550
D) $580

Question 36

Scenario: Trinity deposits $8,000 in a bank at an interest rate of 8 percent per year compounded annually.
Refer to the scenario above.What will be the future value of the deposit after 2 years?

A) $8,761.20
B) $8,990.40
C) $9,000
D) $9331.20

Question 37

Scenario: Trinity deposits $8,000 in a bank at an interest rate of 8 percent per year compounded annually.
Refer to the scenario above.What will be the future value of the deposit after 3 years?

A) $9,822.63
B) $9,964.21
C) $10,077.70
D) $10,220.98

Question 38

Scenario: Consider the following two options. You can either invest $30,000 in a bank that offers you an interest rate of 6 percent compounded annually for 30 years, or you can lend $30,000 to your friend for 30 years at an interest rate of 10 percent compounded annually.
Refer to the scenario above.Which of the following is true?

A) Investing in the bank will provide you a return of $3,521,725.
B) Investing in the bank is comparatively more profitable for you.
C) Lending to your friend is comparatively more profitable for you.
D) You will receive $563,987.92 from your friend after 30 years.

Question 39

Scenario: Consider the following two options. You can either invest $30,000 in a bank that offers you an interest rate of 6 percent compounded annually for 30 years, or you can lend $30,000 to your friend for 30 years at an interest rate of 10 percent compounded annually.
Refer to the scenario above.If you invest your money in the bank,you will receive ________ on maturity.

A) $172,304.74
B) $898,797.66
C) $3,521,725.58
D) $4,020,025.01

Question 40

Scenario: Consider the following two options. You can either invest $30,000 in a bank that offers you an interest rate of 6 percent compounded annually for 30 years, or you can lend $30,000 to your friend for 30 years at an interest rate of 10 percent compounded annually.
Refer to the scenario above.If you lend $30,000 to your friend for 30 years,you will receive ________ when she repays the amount after 30 years.

A) $552,604.62
B) $523,482.07
C) $1,521,725.58
D) $3,620,025.01

Question 41

Which of the following is most likely to increase an individual's future spending?

A) Paying back a loan in the future
B) Borrowing money today
C) Depositing money in the future
D) Withdrawing money in the future

Question 42

Scenario: A friend approaches you with four different investment plans that offer you the following returns on an investment of $10,000.
Plan 1: promises a return of $20,000 in 5 years
Plan 2: promises you a return of $5,000 in 2 years and $2,000 in 3 years
Plan 3: promises you a return of $20,000 in 20 years
Plan 4: promises you a return of $15,000 in 10 years
The market rate of interest is 5 percent.
Refer to the scenario above.The present value of the positive cash flows from the investment in Plan 2 is equal to ________.

A) $9,209
B) $6,263
C) $15,670
D) $7,537

Question 43

Which of the following is most likely to increase an individual's current spending?

A) Paying back a loan today
B) Borrowing money today
C) Depositing money today
D) Withdrawing money in the future

Question 44

Which of the following represents the correct formula for present value?

A) Present value = Payment T periods from now × (1 + interest rate)ᵀ
B) Present value = Payment T periods from now ‒ (1 + interest rate)ᵀ
C) Present value = Payment T periods from now + (1 + interest rate)ᵀ
D) Present value = Payment T periods from now/(1 + interest rate)ᵀ

Question 45

What is the discounted value of $60,000 to be received after 6 years if the ongoing rate of interest is 6 percent per year?

A) $41,212.84
B) $42,297.63
C) $44,666.95
D) $51,220.64

Question 46

Suppose the annual rate of interest is r percent.Which of the following statements is true of the future value of $1,000 for a time of T years?

A) Irrespective of whether the sum of $1,000 is borrowed or lent, the future value in both cases will equal (1 ‒ r)ᵀ × $1,000.
B) Irrespective of whether the sum of $1,000 is borrowed or lent, the future value in both cases will equal (1 + r)ᵀ × $1,000.
C) If $1,000 is borrowed, the future value will equal (1 + r)ᵀ × $1,000, but if it is lent out, the future value will equal (1 ‒ r)ᵀ × $1,000.
D) If $1,000 is borrowed, the future value will equal (1 ‒ r)ᵀ × $1,000, but if it is lent out, the future value will equal (1 + r)ᵀ × $1,000.

Question 47

The ________ of a future payment is the amount of money that needs to be invested today to produce the future payments.

A) implicit value
B) explicit value
C) present value
D) real value

Question 48

Scenario: A friend approaches you with four different investment plans that offer you the following returns on an investment of $10,000.
Plan 1: promises a return of $20,000 in 5 years
Plan 2: promises you a return of $5,000 in 2 years and $2,000 in 3 years
Plan 3: promises you a return of $20,000 in 20 years
Plan 4: promises you a return of $15,000 in 10 years
The market rate of interest is 5 percent.
Refer to the scenario above.The net present value of the investment in Plan 4 is equal to ________.

A) ‒$8,001
B) ‒$556
C) ‒$791
D) ‒$3,737

Question 49

A sum of $10,000 is deposited in a bank.Consider two scenarios: the bank offering an annual rate of interest of 10 percent and the bank offering an annual rate of interest of 15 percent.Compare the time value of money generated in both cases for the following periods.
a)After 1 year
b)After 5 years

Question 50

Which of the following is most likely to reduce an individual's current spending?

A) Paying back a loan in the future
B) Depositing money in a bank today
C) Borrowing money today
D) Withdrawing money in the future

Question 51

Which of the following statements is true?

A) An individual's future spending decreases when she lends money.
B) An individual's future spending increases when she borrows money.
C) An economic agent borrows to move her spending from the future to the present.
D) An economic agent borrows to move her spending from the present to the future.

Question 52

The present value of a sum of money to be received in the future is high if the ________.

A) money is invested for a long period of time
B) market rate of interest is low
C) rate of inflation is high
D) future payment is low

Question 53

Which of the following statements is true?

A) An individual's current spending increases when he lends money.
B) An individual's current spending decreases when he borrows money.
C) An economic agent lends to move his spending from the future to the present.
D) An economic agent lends to earn a return.

Question 54

What is the present value of $10,000 to be received after 1 year if the current annual rate of interest is 6 percent?

A) $8,644.26
B) $8,922.34
C) $9,433.96
D) $10,000

Question 55

The discounted value of a future payment is also referred to as ________ value.

A) implicit
B) explicit
C) present
D) temporal

Question 56

What is the present value of $50,000 to be received after 1 year if the market rate of interest is 8 percent per year?

A) $44,110.98
B) $44,322.87
C) $46,296.30
D) $48,376.21

Question 57

Jenna deposits $1,000 in a bank at an interest rate of 6 percent compounded annually.Calculate the future value of the sum deposited for the following periods.
a)After 2 years
b)After 4 years

Question 58

Scenario: A friend approaches you with four different investment plans that offer you the following returns on an investment of $10,000.
Plan 1: promises a return of $20,000 in 5 years
Plan 2: promises you a return of $5,000 in 2 years and $2,000 in 3 years
Plan 3: promises you a return of $20,000 in 20 years
Plan 4: promises you a return of $15,000 in 10 years
The market rate of interest is 5 percent.
Refer to the scenario above.Which of the following will you choose in order to maximize returns?

A) Plan 1
B) Plan 2
C) Plan 3
D) Plan 4

Question 59

If a sum of $15,000 is borrowed at 13 percent for 1 year,the interest paid by the borrower is ________.

A) $750
B) $1,000
C) $1,950
D) $5,500

Question 60

Which of the following is most likely to reduce an individual's future spending?

A) Withdrawing money today
B) Lending money today
C) Paying back a loan in the future
D) Withdrawing money in the future

Question 61

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.Which of the following statements is true?

A) The present value of Option A > The present value of Option B.
B) The present value of Option A > The present value of Option C.
C) The present value of Option B > The present value of Option C.
D) The present value of Option B > The present value of Option A.

Question 62

Scenario: An investment of $20,000 offers a return of $15,000 in 10 years and another return of $15,000 after 15 years. The market rate of interest is 6 percent per year.
Refer to the scenario above.What is the sum of the present values of the returns from this investment?

A) $12,887.64
B) $14,634.90
C) $19,524.69
D) $29,524.19

Question 63

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.What is the present value of Option C?

A) $2,763.64
B) $3,662.44
C) $4,516.80
D) $5,800.79

Question 64

Define the discounted value of a future payment.

Question 65

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.What is the present value of Option A?

A) $2,464.11
B) $2,385.07
C) $2,463.66
D) $4,898.46

Question 66

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.If the investor plans to invest a sum of $4,000,the net present value of Option A is ________.

A) ‒$1,535.89
B) ‒$1,614.93
C) $898.46
D) $1,535.89

Question 67

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.What is the present value of Option B?

A) $2,463.66
B) $3,267.99
C) $4,157.46
D) $5,800.79

Question 68

If the market rate of interest is 8 percent per year,what is the present value of $10,000 to be received for the following periods?
a)After 5 years
b)After 10 years

Question 69

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.If the investor plans to invest a sum of $4,000,which of the following statements is true?

A) All three investment options are equally profitable.
B) Options A and B are profitable investment options, whereas Option C is not.
C) Options A and C are profitable investment options, whereas Option B is not.
D) Options B and C are profitable investment options, whereas Option A is not.

Question 70

Differentiate between principal and the time value of money.John invests $100 in a bank for a year.At the end of the year,he receives $125.What is the principal and the time value of money in this case?

Question 71

Scenario: An investment of $20,000 offers a return of $15,000 in 10 years and another return of $15,000 after 15 years. The market rate of interest is 6 percent per year.
Refer to the scenario above.What is the net present value of the investment?

A) ‒$7,112.36
B) ‒$5,365.10
C) ‒$475.31
D) $9,524.19

Question 72

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.If the investor plans to invest a sum of $4,000,the net present value of Option C is ________.

A) ‒$1,236.36
B) ‒$337.56
C) $516.80
D) $1,800.79

Question 73

Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years.
Refer to the scenario above.What is the net present value of his friend's project?

A) −$459.32
B) −$666.21
C) $534.66
D) $616.21

Question 74

Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years.
Refer to the scenario above.What is the present value of $3,400 to be received after 5 years?

A) $2,300.78
B) $2,540.68
C) $3,200.22
D) $3,526.44

Question 75

The ________ of a project is the sum of all the costs and benefits associated with the project,using present values to make the costs and benefits comparable.

A) discounted value
B) cumulative present value
C) net present value
D) gross present value

Question 76

The net present value of a project equals ________.

A) Discounted benefit ‒ Discounted cost
B) Discounted cost × Discounted benefit
C) Discounted cost/Discounted benefit
D) Discounted benefit/Discounted cost

Question 77

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent.
Refer to the scenario above.If the investor plans to invest a sum of $4,000,the net present value of Option B is ________.

A) ‒$1,536.34
B) ‒$2,322.12
C) $157.46
D) $1,800.79

Question 78

An investment option is profitable if its ________.

A) net present value is zero
B) net present value is positive
C) net present value is negative
D) present value is negative

Question 79

Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years.
Refer to the scenario above.Which of the following statements is true?

A) The discounted value of $3,400 to be received after 5 years is $3,000.
B) Tom's return from investing in his friend's project is higher than the amount he would receive from the bank after 5 years.
C) Tom's return from investing in the bank is higher than the amount he would receive from his friend's project after 5 years.
D) The returns on both investments are likely to be similar, and Tom should be indifferent about investing in either option.

Question 80

Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years.
Refer to the scenario above.What will be the balance in Tom's account after 5 years if he deposits $3,000 in the bank?

A) $3,222.64
B) $3,400
C) $4,014.68
D) $4,111.78