Question 1

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Accepted Answer

This statement is true. Present value is the concept of determining the value today of a future sum of money, taking into account the time value of money and the current interest rate.

Question 2

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

The future value of $1 saved today is actually $1 * (1 + r)^n, where r is the interest rate and n is the number of periods. The formula $1/(1 + r) represents the present value of $1 received in the future, not its future value.

Question 3

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

Risk aversion refers to the preference for avoiding losses over acquiring equivalent gains; it's about the preference for certainty over uncertainty, not just disliking bad things.

Question 4

The rule of 70 applies to a growing savings account but not to a growing economy.

Accepted Answer

The rule of 70 can be applied to both a growing savings account and a growing economy. It is a simplified tool for estimating the time required for a quantity to double based on its growth rate. For example, if an economy grows at a rate of 7% per year, it would take approximately 10 years for the economy to double in size (70 ÷ 7 = 10). Similarly, if a savings account earns interest at a rate of 5% per year, it would take approximately 14 years for the account balance to double (70 ÷ 5 = 14).

Question 5

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Accepted Answer

The present value of a future payment decreases as the interest rate increases, because a higher rate means a greater discount is applied to the future payment.

Question 6

If the interest rate is 8 percent,then the present value of $1,000 to be received in 4 years is $735.03.

Accepted Answer

The present value (PV) of $1,000 to be received in 4 years at an 8 percent interest rate can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($1,000), r is the annual interest rate (0.08), and n is the number of years (4). Plugging in these values gives PV = $1,000 / (1 + 0.08)^4 = $1,000 / 1.36049 = $735.03.

Question 7

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

Present value is the concept that tells us that the value of money in the future is worth less than the same amount of money present today due to the opportunity cost of not being able to invest that money today. As interest rates increase, the present value of future cash flows decreases, which means that borrowers will demand fewer funds at higher interest rates. Therefore, the quantity of loanable funds demanded decreases when the interest rate increases.

Question 8

The sooner a payment is received and the higher the interest rate,the greater the present value of a future payment.

Accepted Answer

The present value of a future payment decreases as the interest rate increases or the payment is received later, because present value is inversely related to the interest rate and the time until payment.

Question 9

Economists disagree as to whether

Accepted Answer

Economists have debated the efficiency of the stock market and whether stock prices truly reflect a company's fundamental value. Some argue that stock prices are subject to irrational fluctuations and can deviate from a company's true worth. Others believe that stock prices reflect rational estimates of a company's future profits and risks. However, the consensus is that stock prices do overall reflect rational estimates of a company's true worth, making choice C the correct answer.

Question 10

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

Accepted Answer

As the interest rate increases, the discount factor used in calculating the present value of future sums increases as well, resulting in a lower present value. This makes potential investment projects less profitable as their future returns are worth less in today's dollars.

Question 11

If a savings account pays 5 percent annual interest,then the rule of 70 tells us that the account value will double in approximately 14 years.

Accepted Answer

The rule of 70 states that to find the approximate number of years it takes for a certain variable to double, divide the value 70 by the variable's annual growth rate. In this case, 70 divided by 5 gives us 14, which means the savings account value will double in approximately 14 years if it pays 5 percent annual interest.

Question 12

Stock market fluctuations

Accepted Answer

The stock market is often considered a leading indicator of economic health and can go hand in hand with fluctuations in the economy as a whole. Economic events, such as changes in interest rates or GDP growth, can affect the stock market and cause fluctuations.

Question 13

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.

Accepted Answer

The answer of According to the rule of 70,if you...

Question 14

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today.If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years,then ZZL will undertake the project.

Accepted Answer

The answer of ZZL Corporation has the opportunity to undertake...

Question 15

A company that can build a project that will cost $50,000,but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Accepted Answer

At an interest rate of 3 percent, the present value of future cash flows (in this case, the $52,000 return) would be higher than the initial investment of $50,000. Therefore, it would be a good decision to undertake the project.

Question 16

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years.PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

The project's net present value (NPV) can be calculated using the formula: NPV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + ... + CFn / (1+r)^n, where CF is the cash flow in each year and r is the discount rate. In this case, the cash flow is $13,310 in year 3, and the initial investment is $10,000, so the NPV = $13,310 / (1+10%)^3 - $10,000 = $310. Since the NPV is positive, the project should be accepted. If the interest rate is higher than 10%, the NPV will be negative, and the project should be rejected. Therefore, the statement is true.

Question 17

Risk-averse individuals like good things more than they dislike comparable bad things.

Accepted Answer

Risk-averse individuals dislike losses more than they like comparable gains, which is a reflection of loss aversion, a concept in prospect theory.

Question 18

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Accepted Answer

The present value of a sum of money to be received in the future decreases as the time to receipt increases, due to the time value of money. Therefore, $100 to be paid in two years has a higher present value than $100 to be paid in three years.

Question 19

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

An increase in the interest rate increases the future value of money saved in a bank account because the amount of interest earned on the saved money will be higher.

Question 20

If you are faced with the choice of receiving $500 today or $800 6 years from today,you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Accepted Answer

Using the formula for present value of a future amount, we can calculate the present value of $800 received 6 years from now at an interest rate of 8.148 percent:
PV = FV / (1 + r)^n
PV = 800 / (1 + 0.08148)^6
PV = $500.0058 (rounded to nearest cent)
Therefore, the present value of receiving $800 6 years from today is basically the same as receiving $500 today, making the two options equally desirable.

Quiz 27: The Basic Tools of Finance