Deck 7: Interest Rates and Present Value

Question 1

Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 6 is

A)"$" for the amount borrowed/saved.
B)"$*" for the equilibrium amount borrowed/saved.
C)"r" for interest rate.
D)"r*" for equilibrium interest rate.

Answer 1

A

Question 2

The percentage of a balance that a borrower must pay a lender is called the

A)inflation rate.
B)usury rate.
C)interest rate.
D)monetary index.

Answer 2

C

Question 3

If an investment (where the costs are incurred before then profits)makes sense when the interest rate on the borrowed money to pay for it is 10%

A)an increase in the interest rate will cause the investment to lose money.
B)an increase in the interest rate will cause the investment to be more profitable.
C)a decrease in the interest rate will cause the investment to make even more money.
D)a decrease in the interest rate will cause the investment to be less profitable, but it still may make money.

Answer 3

C

Question 4

Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 4 is

A)"$" for the amount borrowed/saved.
B)"$*" for the equilibrium amount borrowed/saved.
C)"r" for interest rate.
D)"r*" for equilibrium interest rate.

Question 5

The notion of interest sensitive consumption would be most readily observed when people buy

A)furniture.
B)food.
C)insurance.
D)health care.

Question 6

Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 1 is

A)"$" for the amount borrowed/saved.
B)"$*" for the equilibrium amount borrowed/saved.
C)"r" for interest rate.
D)"r*" for equilibrium interest rate.

Question 7

The notion of interest sensitive consumption would be most readily observed when people buy

A)cars.
B)food.
C)insurance.
D)higher education.

Question 8

In a market for money

A)borrowers are the suppliers and lenders are the consumers.
B)borrowers are the consumers and lenders are the suppliers.
C)both borrowers and lenders are the consumers.
D)both borrowers and lenders are the suppliers.

Question 9

In a market for money, it is typically the case that we use the ________ in a supply and demand model.

A)inflation rate
B)interest rate
C)wage rate
D)monetary index

Question 10

A higher interest rate

A)increases the motivation to delay consumption and, therefore, save.
B)increases the motivation to delay consumption and, therefore, borrow.
C)decreases the motivation to delay consumption and, therefore, save.
D)decreases the motivation to delay consumption and, therefore, borrow.

Question 11

In a supply and demand model for the market for money, we typically use the _____ to look at savers' behavior.

A)the demand curve
B)the supply curve
C)the production possibilities frontier
D)the surplus curve

Question 12

Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 3 is

A)"$" for the amount borrowed/saved.
B)"$*" for the equilibrium amount borrowed/saved.
C)"r" for interest rate.
D)"r*" for equilibrium interest rate.

Question 13

In a supply and demand model for the market for money, we typically use the _____ to look at borrowers' behavior.

A)the demand curve
B)the supply curve
C)the production possibilities frontier
D)the surplus curve

Question 14

The demand for money is likely downward sloping because

A)interest sensitive consumption and business investment are both negatively impacted by increases in the interest rate.
B)interest sensitive consumption and business investment are both positively impacted by increases in the interest rate.
C)the marginal revenue product of labor is decreasing.
D)the government can always borrow what it wants.

Question 15

The notion of business investment being related to interest rates is shown when interest rates are

A)higher, more projects (where businesses borrow capital to start new lines of business)are profitable.
B)higher, fewer projects (where businesses borrow capital to start new lines of business)are profitable.
C)higher, people are less likely to buy expensive goods on installments.
D)higher, people are more likely to buy expensive goods on installments.

Question 16

An increase in the interest rate will

A)increase the demand for money alone.
B)decrease the demand for money and increase the supply of money.
C)increase the demand for money and decrease the supply of money.
D)change neither the demand nor the supply of money; rather it will only affect the quantity demanded and quantity supplied.

Question 17

In the market for money the price is

A)the interest rate.
B)the wage rate.
C)the exchange rate.
D)the premium.

Question 18

Interest sensitive consumption is negatively impacted by interest rates because when you

A)pay cash for something, the price you really pay depends on the interest rate.
B)buy something on installments (like a car)your payments are positively related to the interest rate so a higher interest rate would mean a higher payment, and therefore, less interest sensitive consumption.
C)buy something on installments (like a car)your payments are negatively related to the interest rate so a higher interest rate would mean a higher payment, and therefore, less interest sensitive consumption.
D)buy something you really need, the price you really pay depends on the interest rate.

Question 19

A decrease in the interest rate will

A)increase the demand for money alone.
B)decrease the demand for money and increase the supply of money.
C)increase the demand for money and decrease the supply of money.
D)change neither the demand nor the supply of money; rather it will only affect the quantity demanded and quantity supplied.

Question 20

If an investment (where the costs are incurred before then profits)makes sense when the interest rate on the borrowed money to pay for it is 10%

A)an increase in the interest rate will cause the investment to lose money.
B)an increase in the interest rate will cause the investment to be less profitable, but it still may make money.
C)a decrease in the interest rate will cause the investment to lose money.
D)a decrease in the interest rate will cause the investment to be less profitable, but it still may make money.

Question 21

If people (who used to neither borrow nor save)are now saving for their retirement then this will cause the

A)supply for loanable funds to increase.
B)demand for loanable funds to increase.
C)supply for loanable funds to decrease.
D)demand for loanable funds to decrease.

Question 22

If people (who used to neither borrow nor save)are now borrowing to put their kids through college then this will cause the

A)supply for loanable funds to increase.
B)demand for loanable funds to increase.
C)supply for loanable funds to decrease.
D)demand for loanable funds to decrease.

Question 23

When evaluating whether or not to make an investment one should focus on the _____ because doing so takes into account anticipated inflation.

A)nominal interest rate
B)exchange rate
C)real interest rate
D)junk bond rate

Question 24

If the inflation rate is 6% and the real interest rate is 4%, then the nominal interest rate is around

A)2%.
B)-2%.
C)6%.
D)10%.

Question 25

An increase in the confidence that equipment-buying firms have in their future profitability will

A)increase the demand for borrowable money.
B)decrease the demand for borrowable money.
C)increase the supply of borrowable money.
D)decrease the supply of borrowable money.

Question 26

If the inflation rate is 5% and the real interest rate is 4%, then the nominal interest rate is around

A)-1%.
B)1%.
C)9%.
D)20%.

Question 27

The difference between nominal and real interest rates is that

A)real interest rates are almost always greater than nominal interest rates.
B)real interest rates are what you get after having adjusted nominal rates for inflation.
C)nominal interest rates are what lenders receive and real interest rates are what borrowers pay.
D)nominal interest rates are what borrowers pay and real interest rates are what lenders receive.

Question 28

Suppose there is a decrease in the confidence that workers have in their future employment and income. This will cause

A)a decrease in borrowing which will decrease interest rates.
B)a decrease in saving which will decrease interest rates.
C)a decrease in borrowing which will increase interest rates.
D)a decrease in saving which will increase interest rates.

Question 29

An increase in the confidence that equipment-buying firms have in their future profitability will

A)increase the demand for borrowable money.
B)decrease the demand for borrowable money.
C)increase the supply of borrowable money.
D)decrease the supply of borrowable money.

Question 30

A decrease in the confidence that car-buying consumers have in their future income will

A)increase the demand for borrowable money.
B)decrease the demand for borrowable money.
C)increase the supply of borrowable money.
D)decrease the supply of borrowable money.

Question 31

If the inflation rate is 2% and the real interest rate is 1%, then the nominal interest rate is around

A)-1%.
B)1%.
C)2%.
D)3%.

Question 32

If the inflation rate is 5% and the nominal interest rate is 4%, then the real interest rate is around

A)-1%.
B)1%.
C)9%.
D)20%.

Question 33

If the inflation rate is 3% and the real interest rate is 4%, then the nominal interest rate is around

A)1%.
B)3%.
C)7%.
D)12%.

Question 34

An increase in the confidence that car-buying consumers have in their future income will

A)increase the demand for borrowable money.
B)decrease the demand for borrowable money.
C)increase the supply of borrowable money.
D)decrease the supply of borrowable money.

Question 35

If the inflation rate is 2% and the nominal interest rate is 1%, then the real interest rate is around

A)-1%.
B)1%.
C)2%.
D)3%.

Question 36

If people (who used to neither borrow nor save)are now saving for their retirement then this will cause the equilibrium interest rate

A)to rise.
B)to fall.
C)to fluctuate wildly.
D)to remain constant.

Question 37

If people (who used to neither borrow nor save)are now borrowing to put their kids through college then this will cause the equilibrium interest rate

A)to rise.
B)to fall.
C)to fluctuate wildly.
D)to remain constant.

Question 38

Suppose there is an increase in the confidence that workers have in their future employment and income. This will cause

A)an increase in borrowing which will decrease interest rates.
B)an increase in saving which will decrease interest rates.
C)an increase in borrowing which will increase interest rates.
D)an increase in saving which will increase interest rates.

Question 39

In the market for loanable dollars, an increase in the profitability of investments overall will be revealed in

A)an increase in the supply of loanable dollars.
B)an increase in the demand for loanable dollars.
C)a decrease in the supply of loanable dollars.
D)a decrease in the demand for loanable dollars.

Question 40

If the inflation rate is 3% and the nominal interest rate is 4%, then the real interest rate is around

A)1%.
B)3%.
C)7%.
D)12%.

Question 41

If a business makes the determination that an investment makes sense at the current interest rate but before they can act the interest rates rises

A)they will have to recalculate whether it still makes sense.
B)it will only make the situation better so they will clearly make the investment.
C)it will cause them to not make the investment regardless of the increase.
D)they will go ahead with the investment because interest rates have nothing to do with whether an investment makes sense.

Question 42

If a business makes the determination that an investment makes sense at the current interest rate but before they can act the interest rates fall

A)they will have to recalculate whether it still makes sense.
B)it will only make the situation better so they will clearly make the investment.
C)it will cause them to not make the investment regardless of the decrease.
D)they will go ahead with the investment because interest rates have nothing to do with whether an investment makes sense.

Question 43

If your broker tells you that a trust to which you are a beneficiary has changed and instead of getting $5000 per year starting next year you will be getting $6000 per year but it will be starting the year after next the present value to you has

A)fallen.
B)risen.
C)remained unchanged.
D)might have either fallen or risen, depending on the interest rate.

Question 44

To determine whether an investment makes sense a business will compute the net present value and if the result is

A)negative they will make the investment.
B)positive they will make the investment.
C)positive they will not make the investment unless the interest rate rises.
D)positive they will not make the investment regardless of the change in interest rates.

Question 45

When evaluating a business decision, an economist will often resort to the use of present value because

A)the profits may not be large enough to warrant the time and attention of the investor.
B)the investment occurs in one time period and the profits in another.
C)the investment is often in one currency and the profits in another.
D)the investment is often under one set of managers and the profits under another.

Question 46

If your broker tells you that a trust to which you are a beneficiary has changed and instead of getting $5000 per year starting next year you will be getting $6000 per year starting next year the present value to you has

A)fallen.
B)risen.
C)remained unchanged.
D)necessarily become more predictable.

Question 47

The possibility that an investor will not receive full payment is called

A)an advance.
B)credit.
C)the index problem.
D)risk.

Question 48

The present value of a $1000 payment received 2 years from now at 5% annual interest will be less than $900 because of

A)taxes.
B)compounding.
C)withholding.
D)double jeopardy.

Question 49

If the interest rate is positive, the present value of a stream of payments is

A)greater than the sum of the actual payments over time.
B)less than the sum of the actual payments over time.
C)equal to the sum of the actual payments over time.
D)unrelated to the stream of actual payments over time.

Question 50

If you are anticipating having to pay $100,000 to a lender 10 years from now and the interest rate rises, the present value of this sum

A)falls.
B)rises.
C)remains unchanged.
D)first rises, then falls.

Question 51

If you are anticipating having to pay $100,000 to a lender 10 years from now and the interest rate falls, the present value of this sum

A)falls.
B)rises.
C)remains unchanged.
D)becomes more uncertain.

Question 52

If you have a business opportunity that is pretty much a sure thing that will require you to borrow $1,000,000, but will return to you $200,000 a year in profit for ten years, this is

A)a wise investment regardless of interest rates.
B)an unwise investment regardless of interest rates.
C)an investment which depends on the interest rate that must be paid on the loan.
D)an investment which will be more attractive when the interest rate is high.

Question 53

If your broker tells you that a trust to which you are a beneficiary has changed and instead of getting $5000 per year starting next year you will be getting $4000 per year starting next year, the present value to you has

A)fallen.
B)risen.
C)remained unchanged.
D)necessarily become more predictable.

Question 54

If the interest rate is positive, the present value of $1000 to be received in ten years is

A)less than $1000.
B)greater than $1000.
C)equal to $1000.
D)either greater than $1000 or less than $1000, depending upon the interest rate

Question 55

Using an interest rate of 5%, which figure has the largest present value

A)$5000.
B)$5050 to be received two years from now.
C)$5075 to be received three years from now.
D)$5500 to be received ten years from now.

Question 56

Using an interest rate of 5%, which figure has the smallest present value

A)$5000.
B)$5050 to be received two years from now.
C)$5075 to be received three years from now.
D)$5500 to be received ten years from now.

Question 57

If payments of $1000 are to be received every year for 20 years and if the interest rate is positive, the present value of this stream will

A)exceed $1000x20 ($20,000).
B)equal $1000x20 ($20,000)
C)be less than $1000x20 ($20,000).
D)increase as the interest rate increases.

Question 58

If you know that you can afford a $500 per month car payment for the next 48 months, the interest rate is positive and you have found a car dealer who will agree to a zero down payment you will

A)be able to afford a $25,000 car (which is more than $500x48).
B)be able to afford a $24,000 car (which is exactly $500x48).
C)be able to afford something less than a $24,000 car.
D)be able to finance a more expensive car when the interest rate is high.

Question 59

A 60 month car loan (where no down payment was made)with a 6% interest rate and a monthly payment of $500 would allow the borrower to buy a

A)$35,500 car.
B)$30,000 car.
C)$25,863 car.
D)$28,200 car.

Question 60

Suppose your grandmother told you (today)that she had set aside an amount of money in a savings account bearing 3% interest that was sufficient to give you a $5,000 graduation present in exactly four years. How much would she have had to set aside?

A)$5000.
B)$5000 x (1.03)⁴.
C)$5000 / (1.03)⁴.
D)$5000 / (1+.034).

Question 61

If your grandmother gives you $5,000 and you don't spend it, but invest it to earn 8% per year compounded annually, it will be worth $10,000 at the end of

A)72 years.
B)10 years.
C)9 years.
D)8 years.

Question 62

In the market for money the demand curve is made up of

A)borrowers.
B)savers.
C)neither borrowers nor savers.
D)a combination of borrowers and savers.

Question 63

The interest-adjusted value of past payments is

A)intrinsic value.
B)real value.
C)present value.
D)future value.

Question 64

So long as the interest is greater than zero, the future value of any balance is

A)greater than the value itself.
B)smaller than the value itself.
C)equal to the value itself.
D)either larger or smaller than the balance itself, depending upon the size of the positive interest rate.

Question 65

A typical firm that needs operating capital has

A)constantly increasing income.
B)seasonal income.
C)constantly decreasing income.
D)unpredictable income.

Question 66

The form of risk to the lender associated with a borrower not paying their debt is called

A)market risk.
B)default risk.
C)overall risk.
D)complete risk.

Question 67

If your grandmother gives you a high school graduation gift of $5,000 and you do not spend the gift, but invest it to earn an interest rate of 6% per year compounded annually, upon your graduation from college after exactly four years your gift will be worth approximately

A)$5000.
B)$5789.
C)$6312.
D)$9327.

Question 68

The interest rate at which the present value of costs equals the present value benefits is the

A)coupon interest rate.
B)yield to maturity.
C)internal rate of return.
D)market interest rate

Question 69

In the market for money the supply curve is made up of

A)borrowers.
B)savers.
C)neither borrowers nor savers.
D)a combination of borrowers and savers.

Question 70

Dividing the number seventy-two by an interest rate yields

A)the square root of seventy-two.
B)the lowest common denominator of seventy-two.
C)the real interest rate after seventy-two years.
D)the Rule of 72.

Question 71

The form of risk to the investor associated with the asset unexpectedly falling in price is called

A)market risk.
B)default risk.
C)overall risk.
D)complete risk.

Question 72

The reward investors receive for accepting the probability that they will not be fully paid as agreed or as anticipated is called the

A)risk adjustment.
B)risk premium.
C)interest rate.
D)real interest rate.

Question 73

In the market for money the behavior of borrowers is represented by the

A)demand curve.
B)supply curve.
C)neither the supply curve nor the demand curve.
D)a combination of the supply and demand curves.

Question 74

Dividing the number seventy-two by an interest rate yields

A)the annual payment required to pay off a loan at that interest rate.
B)the number of years it would take an investment to double in value.
C)a good measure of the level of risk in the investment proposal.
D)all of these options are correct.

Question 75

If your grandmother gives you a high school graduation gift of $5,000 and you do not spend the gift, but invest it to earn an interest rate of 6% per year compounded annually, upon your graduation from college after exactly four years your gift will be worth

A)$5000.
B)$5000 x (1.06)⁴.
C)$5000 / (1.04)^4.
D)$5000 / (1+.24).

Question 76

If an investment requires payment of $10,000 now and promises to return a payout of $15,000 one year from now and another payout of $15,000 two years from now, the net present value of the investment at an interest rate of 8% is approximately

A)$5,000.
B)$11,749.
C)$16,749.
D)$26,749.

Question 77

If an investment requires payment of $10,000 now and promises to return a single payout of $15,000 one year from now, the net present value of the investment at an interest rate of 12% is approximately

A)$3,393.
B)$5,000.
C)$10,000.
D)$13,393.

Question 78

Firms need to borrow for operating purposes because they

A)need to pay for goods and services after they have sold them.
B)need to pay for goods and services before they will have revenue from their sales.
C)are always in debt.
D)need constant bailouts.

Question 79

If an investment requires payment of $5,000 now and promises to return a single payout of $15,000 one year from now, the net present value of the investment at an interest rate of 10% is approximately

A)$3,636.
B)$8,636.
C)$10,000.
D)$13,636.

Question 80

The relationship between the rate of return earned on a bond and the length of time until the bond matures is called the

A)interest rate.
B)real interest rate.
C)calendar.
D)yield curve.