Question 1

The "coupon rate" is:

Accepted Answer

A) the annual amount of interest payments made on a bond as a percentage of the amount borrowed. 
B) the change in the value of a bond expressed as a percentage of the amount borrowed. 
C) another name for the yield on a bond, assuming the bond is sold before it matures. 
D) the total amount of interest payments made on a bond as a percentage of the amount borrowed.

Question 2

Suppose Mary receives an $8,000 loan from First National Bank.Mary repays $8,480 to First National Bank at the end of one year.Assuming the simple calculation of interest, the interest rate on Mary's loan was:

Accepted Answer

A) 8.00% 
B) $480 
C) 6.00% 
D) 5.66%

Question 3

Calculate which has a higher present value: an annual payment of $100 received over 3 years or an annual payment of $50 received over 7 years.In both cases the interest rate is 7% (or 0.07).

Accepted Answer

The answer of Calculate which has a higher present value:...

Question 4

Suppose that you have a winning lottery ticket for $100,000.The State of California doesn't pay this amount up front - this is the amount you will receive over time.The State offers you two options.The first pays you $80,000 up front and that will be the entire amount.The second pays you winnings over a three year period.The last option pays you a large payment today with small payments in the future.The payment options are detailed in the table below:

Accepted Answer

The answer of Suppose that you have a winning lottery...

Question 5

If 10% is the annual rate, considering compounding, the monthly rate is:

Accepted Answer

A) 0.0833% 
B) 0.833% 
C) 0.00797% 
D) 1.0833%

Question 6

In reading the national business news, you hear that mortgage rates increased by 50 basis points.If mortgage rates were initially at 6.5%, what are they after this increase?

Accepted Answer

A) 6.55% 
B) 7.0% 
C) 11.5% 
D) 56.5%

Question 7

The present value and the interest rate have:

Accepted Answer

A) a direct relationship; as i increases, pv increases. 
B) an inverse relationship; as i increases, pv decreases. 
C) an unclear relationship; whether it is direct or inverse depends on the interest rate. 
D) no relationship.

Question 8

Credit:

Accepted Answer

A) probably came into being at the same time as coinage. 
B) predates coinage by 2,000 years. 
C) did not exist until the middle ages. 
D) first became popular due to the writings of Aristotle.

Question 9

Suppose a two-year coupon bond has payments of $40 and a face value of $800.The interest rate is 8%.Compute the present value of the coupon payments and the principal payment of the bond.What is the price of this bond?

Accepted Answer

The answer of Suppose a two-year coupon bond has payments...

Question 10

In the data, we observe that countries with high inflation rates tend to have high nominal interest rates.What does this imply, if anything, about real interest rates in countries with very high inflation rates?

Accepted Answer

The answer of In the data, we observe that countries...

Question 11

We should expect a country that experiences volatile inflation to also have:

Accepted Answer

A) volatile nominal interest rates. 
B) volatile real interest rates but stable nominal rates. 
C) stable nominal interest rates. 
D) volatile real interest rates.

Question 12

Suppose Tom receives a one-year loan from ABC Bank for $5,000.00.At the end of the year, Tom repays $5,400.00 to ABC Bank.Assuming the simple calculation of interest, the interest rate on Tom's loan was:

Accepted Answer

A) $400 
B) 8.00% 
C) 7.41% 
D) 20%

Question 13

Suppose you negotiate a one-year loan with a principal of $1000 and the nominal interest rate is currently 7%.You expect the inflation rate to be 3% over the next year.When you repay the principal plus interest at the end of the year, the actual inflation rate is 2.5%.Compute the ex ante and ex post real interest rate.Who benefits from this unexpected decrease in inflation? Who loses?

Accepted Answer

The answer of Suppose you negotiate a one-year loan with...

Question 14

A lender is promised a $100 payment (including interest) one year from today.If the lender has a 6% opportunity cost of money, he/she should be willing to accept what amount today?

Accepted Answer

A) $100.00 
B) $106.20 
C) $96.40 
D) $94.34

Question 15

Explain why an investor cannot simply compare the size of promised payments from different investments, even if the interest rates and other risk factors are the same.

Accepted Answer

The answer of Explain why an investor cannot simply compare...

Question 16

Which of the following statements is most correct?

Accepted Answer

A) We can always compute the ex post real interest rate but not the ex ante real rate. 
B) We cannot compute either the ex post or ex ante real interest rates accurately. 
C) We can accurately compute the ex ante real interest rate but not the ex post real rate. 
D) None of the statements are correct.

Question 17

The interest rate that equates the price of a bond with the present value of its payments:

Accepted Answer

A) will vary directly with the value of the bond. 
B) should be the one that makes the value equal to the par value of the bond. 
C) will vary inversely with the value of the bond. 
D) should always be greater than the coupon rate.

Question 18

A credit card that charges a monthly interest rate of 1.5% has an effective annual interest rate of:

Accepted Answer

A) 18.0% 
B) 19.6% 
C) 15.0% 
D) 17.50%

Question 19

Historically, many cultural groups have outlawed usury, or the practice of levying interest on loans.Some groups oppose usury because it exacerbates problems of income inequality (as wealthier individuals can afford to lend to poorer individuals), while others claim investment and loans should be made charitably.Evaluate these arguments against usury based on your knowledge of present value.Do such prohibitions make sense?

Accepted Answer

The answer of Historically, many cultural groups have outlawed usury,...

Question 20

A monthly growth rate of 0.6% is an annual growth rate of:

Accepted Answer

A) 7.20% 
B) 6.00% 
C) 7.60% 
D) 7.44%

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