Deck 2: Time Value of Money, Financial Markets, the Reserve Bank of Australia and Interest Rates

Question 1

Noah Cyrus is investing $5,000 in an account paying 6.75 percent per annum. How much interest-on-interest will he have earned after three years, if interest is compounded annually?

A) $69.88.
B) $82.38.
C) $1,012.50.
D) $1,082.38.

Answer 1

$69.88.

Question 2

Lois has deposited $2,000 in an investment account that pays 5% compounded continuously. How much will she have in her account in two years?

A) $1,809.67.
B) $2,105.54.
C) $2,210.34.
D) $2,205.00.

Answer 2

$2,210.34.

Question 3

Alexander will receive $25,000 in 3 years. His opportunity cost is 8% compounded continuously. The present value of this cash flow is closest to:

A) $19,665.70.
B) $19,845.81.
C) $31,492.80.
D) $31,781.23.

Answer 3

$19,665.70.

Question 4

Nicky Scarfe is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years' time? (Round to the nearest dollar.)

A) $16,088.
B) $17,133.
C) $23,474.
D) $38,850.

Question 5

Your father promises to give you $10,000 in 10 years' time for your 25th birthday. If interest rates are 12% per annum, how much is that gift worth today?

A) $1,000.
B) $3,220.
C) $6,700.
D) $9,000.

Question 6

What sum would you have to receive in 5 years' time to make you indifferent between that sum and $1,000 in 10 years' time? Assuming that the interest rate is 10% p.a.

A) $500.
B) $621.
C) $645.
D) $710.

Question 7

Shen has $5,000 to invest in a small business venture. His partner has promised to pay him back $8,200 in five years' time. What is the return earned on this investment?

A) 8.7%.
B) 9.3%.
C) 10.4%.
D) 11.1%.

Question 8

You currently have $100 available to invest for a 21 year period. At what interest rate must you invest this amount in order for it to be worth $500 at maturity?

A) 5%.
B) 6.12%.
C) 7.97%.
D) 10%.

Question 9

If inflation is anticipated to be 5 per cent during the next year, while the real rate of interest for a one-year loan is 5 per cent, then what should the nominal rate of interest be for a risk-free one-year loan?

A) 25 per cent.
B) 10 per cent.
C) 5 per cent.
D) none of the above.

Question 10

The current 1-year Treasury rate is 10 per cent. It is predicted that the annual inflation rate is going to be 0.50 per cent higher than originally expected. The higher inflation forecasts reflect unexpectedly strong macroeconomic conditions. What is the current inflation premium? (Assume that the real rate of interest is 9.0 per cent.)

A) 0.5%.
B) 1%.
C) 1.5%.
D) 11%.

Question 11

Which of the following is not an advantage of issuing preference shares?

A) Ownership rights are diluted.
B) Non-payment of dividends cannot pose a solvency risk of debt.
C) The fixed cost of preference share capital allows firms to enhance earnings per ordinary share.
D) Both A and B

Question 12

The EU motivation for adopting a common currency is to:

A) make member countries more competitive in global markets.
B) to set a single monetary policy and interest rates for member countries.
C) reduce the economic inefficiency caused by large fluctuations in foreign exchange rates.
D) both A and C

Question 13

Which of the following is not a tool for managing foreign exchange risk?

A) Forward contracting.
B) Company-issued options.
C) Futures contracts.
D) Swaps.