Question 1

The present value of expected future profits will if the discount rate increases and will if expected future profits increase.

Accepted Answer

A)  increase; not change 
B)  increase; increase 
C)  not change; decrease 
D)  decrease; increase 
E)  decrease; decrease D

Question 2

You borrow money from Fast Eddie's Fast Cash at 20% per year interest and agree to pay $500 at the end of each of the next four years.You must have borrowed approximately:

Accepted Answer

A)  $2,000. 
B)  $1,595. 
C)  $1,295. 
D)  $1,095. 
E)  $895. C

Question 3

If the annual interest rate is 25%,the present discounted value of $100 to be received in one year is:

Accepted Answer

A)  $75. 
B)  $80. 
C)  $100. 
D)  $120. 
E)  $125. B

Question 4

You buy your child a $100 savings bond that matures in 10 years and pays an annual interest rate of 10%.At maturity the bond will be worth:

Accepted Answer

A)  $228.17. 
B)  $200. 
C)  $259.37. 
D)  $271.17. 
E)  $217.71.

Question 5

If the annual interest rate is i,the present value of $X to be received at the end of each future year forever is:

Accepted Answer

A)  $X/(1 + i). 
B)  $X/i. 
C)  $X/(1 + i)n. 
D)  $X/i n. 
E)  $Xn/i n.

Question 6

If the annual interest rate is i,the present value of $X to be received at the end of each of the next n years is:

Accepted Answer

A)  $X/i. 
B)  $X/(1 + i)n. 
C)  $ \$ X \sum_{t=1}^{n} 1 /(1+i)^{t} $ 
D)  $X[(1 + i)n] / [ i(1 + i)n - 1]. 
E)  $X / [i(1 + i)n - 1].

Question 7

You've just won the $25 million lottery.You are going to receive a check for $1 million today and at the end of every year for the next 24 years.If the interest rate is 10%,the present value of your prize is:

Accepted Answer

A)  $8,984,744. 
B)  $9,984,744. 
C)  $12,984,744. 
D)  $20,000,000. 
E)  $25,000,000.

Question 8

If the annual interest rate is i,the present value of a payment of $X to be received n years from now forever is:

Accepted Answer

A)  $X/(1 + i). 
B)  $X/i. 
C)  $X/(1 + i )n. 
D)  $X/i n. 
E)  none of the above.

Question 9

Your mortgage requires that you pay $12,000 at the end of each of the next 30 years.If the annual interest rate is 12%,then you must have borrowed approximately:

Accepted Answer

A)  $117,660. 
B)  $96,660. 
C)  $78,660. 
D)  $63,660. 
E)  $133,660.

Exam 19: Appendix Problems