Question 1

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Accepted Answer

By choosing the lump-sum payout, lottery winners are indicating a preference for immediate returns rather than delayed ones, and valuing present money more than future money. This could be due to a variety of reasons, such as needing funds immediately or uncertainty about future payouts. It does not necessarily imply an economic irrationality or assumption of rapid inflation.

Question 2

If i is the interest rate and X is the number of dollars to be received after t years, the formula to calculate the present value of a future payment is

Accepted Answer

The answer of If i is the interest rate and...

Question 3

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Accepted Answer

The answer of (Advanced analysis) Tani invests $100 in a...

Question 4

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

Accepted Answer

We need to use the formula for present value: PV = FV / (1 + r)^t
PV = 500 / (1 + 0.05)^8
PV = 338.42, so the best choice is (B).

Question 5

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Accepted Answer

The answer of (Advanced analysis) Alex wants to have $800...

Question 6

(Advanced analysis) Susie has $500 invested in a financial asset earning an annually compounded interest rate of 8 percent.If Susie plans to cash in the asset when it is worth $700, about how long will she have to wait?

Accepted Answer

The answer of (Advanced analysis) Susie has $500 invested in...

Question 7

(Advanced analysis) Indy has $2,000 invested in a financial asset earning an annually compounded interest rate of 6 percent.Approximately how many years will it take before Indy's investment is worth $5,000?

Accepted Answer

The answer of (Advanced analysis) Indy has $2,000 invested in...

Question 8

The present value of a future amount of money will be greater the

Accepted Answer

The answer of The present value of a future amount...

Question 9

The price of an asset should

Accepted Answer

The price of an asset should exactly equal the total present value of all of the asset's future payments, as this takes into account the time value of money and the expected cash flows of the asset.

Question 10

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Accepted Answer

We can use the formula: A = P(1 + r/n)^(nt), where A is the ending amount, P is the initial principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years. 
Plugging in the given values, we get:
3,000 = 2,000(1 + r/1)^(1*5)
Simplifying, we get:
(3/2) = (1 + r)^5
Taking the fifth root of both sides, we get:
1 + r = (3/2)^(1/5)
Subtracting 1 from both sides, we get:
r = (3/2)^(1/5) - 1
Using a calculator, we get r ≈ 0.084 or 8.4%. Therefore, Kara would have to earn an annually compounded rate of interest of 8.4% to reach her goal.

Question 11

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

Accepted Answer

Compound interest is the concept that describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments. Present value refers to the current value of an investment, while future value refers to the value an investment will have in the future based on certain interest rates and time periods. Real rate of interest is the rate of return on an investment adjusted for inflation.

Question 12

The formula for present value allows investors to

Accepted Answer

The formula for present value is used to convert a given number of dollars in the future into its present equivalent. This allows investors to evaluate the current worth of future cash flows and make informed investment decisions based on the present value of those cash flows. The formula does not directly address future inflation or identify which financial assets will provide the greatest future returns.

Question 13

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Accepted Answer

The formula for compound interest is A = P(1+r/n)^(nt), where A is the amount after time t, P is the principal, r is the rate of interest, n is the number of times the interest is compounded per year, and t is the time in years. In this problem, we want to find the rate of interest, r, so we can rearrange the formula to solve for r:
r = n[(A/P)^(1/nt) - 1]
We know that P = $1,000, A = $2,000, t = 8 years, and n is not given, so we can assume it is compounded annually (n = 1). Plugging in these values and solving for r, we get:
r = 9.1%
Therefore, the answer is B) 9.1 percent.

Question 14

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

Accepted Answer

The formula for compound interest is X(1 + i)^t, where X is the principal amount, i is the annual interest rate, and t is the number of years.

Question 15

Which of the following is not common to all investments?

Accepted Answer

Not all investments pay a positive rate of interest, such as stocks or real estate.

Question 16

Which of the following is common to all investments?

Accepted Answer

All investments require some form of payment or purchase, whether it's buying stocks, bonds, real estate, or any other type of asset. However, not all investments pay interest or provide guarantees, and not all are backed by government insurance. Therefore, the only option that is common to all investments is that some price must be paid to acquire them.

Question 17

Suppose that Clint wins a lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

Accepted Answer

Clint should take the lump sum if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments. This is because the $100 million lump sum is worth more today than the $10 million annual payments spread out over 30 years. If Clint can invest the lump sum in financial assets that have a higher rate of return than the interest rate implicit in the annual payments, he can potentially earn more money in the long run. However, if he is not confident in his investment skills, or if he cannot find investments that can generate a high enough return, then he should consider taking the annual payments instead.

Question 18

Professional athletes attempting only to maximize income will defer larger salaries if

Accepted Answer

The answer of Professional athletes attempting only to maximize income...

Question 19

^The^Hazards,^a^professional^baseball^team,^want^to^sign^pitcher^Alex^McScoob^to^a^two-year^contract^but,^because^of^salary^cap^limitations,^can^only^pay^$8^million^for^the^first^year^(Alex's^market^value^is^$10^million^per^year).^The^Hazards^offer^to^pay^$8^millionⁱⁿ^year¹^and^$13^millionⁱⁿ^year^2.Should Alex sign the contract?

Accepted Answer

Alex should sign the contract if the interest rate is less than 50 percent because the present value of the total contract ($21 million) is greater than his market value ($20 million) when discounted at any rate below 50 percent.

Question 20

The present value of a future amount of money will be greater the

Accepted Answer

The answer of The present value of a future amount...

Quiz 17: C: Financial Economics

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

If i is the interest rate and X is the number of dollars to be received after t years, the formula to calculate the present value of a future payment is

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

(Advanced analysis) Susie has $500 invested in a financial asset earning an annually compounded interest rate of 8 percent.If Susie plans to cash in the asset when it is worth $700, about how long will she have to wait?

(Advanced analysis) Indy has $2,000 invested in a financial asset earning an annually compounded interest rate of 6 percent.Approximately how many years will it take before Indy's investment is worth $5,000?

The present value of a future amount of money will be greater the

The price of an asset should

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

The formula for present value allows investors to

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

Which of the following is not common to all investments?

Which of the following is common to all investments?

Suppose that Clint wins a lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

Professional athletes attempting only to maximize income will defer larger salaries if

The present value of a future amount of money will be greater the