Question 1

How much money would you have to put into a savings account today to be worth $500 three years from now at a market rate of interest equal to 8 percent?

Accepted Answer

The answer of How much money would you have to...

Question 2

The real interest rate is the

Accepted Answer

The real interest rate is calculated by subtracting the anticipated inflation rate from the nominal interest rate. This gives an accurate measure of the return on an investment after accounting for the loss in purchasing power due to inflation. Therefore, option D - nominal interest rate minus the anticipated inflation rate - is the correct answer.

Question 3

The present value of $100 to be received one year from now

Accepted Answer

The present value of a future amount of money cannot be accurately determined without knowing the interest rate, as it is essential for discounting the future amount back to its present value.

Question 4

The general form for discounting is

Accepted Answer

The answer of The general form for discounting is
...

Question 5

The rate of interest that you pay on a home loan depends upon all of the following EXCEPT

Accepted Answer

The supply of houses in the real estate market does not have a direct impact on the rate of interest that you pay on a home loan. The other options, such as the length of the loan, your credit rating, and handling charges or loan fees, can all affect the interest rate.

Question 6

Assuming a market rate of interest equal to 7 percent and anticipated inflation is 2 percent, what is the real (adjusted for inflation) present value of $200 to be received one year from today?

Accepted Answer

The answer of Assuming a market rate of interest equal...

Question 7

What is the present value of $104.25 that you could receive one year from now, given that the rate of interest is 4.25 percent?

Accepted Answer

Present value is calculated by dividing future value by 1 plus the interest rate to the power of the number of periods. In this case, the present value would be $100.00, as $104.25 / (1 + 0.0425) = $100.00.

Question 8

If the bank advertises 6 percent annual interest rate on a one-year certificate of deposit and you anticipate the rate of inflation to rise to 3 percent during the year, then the real rate of interest on the certificate of deposit is

Accepted Answer

The real rate of interest can be approximated by subtracting the anticipated inflation rate from the nominal interest rate. Therefore, 6 percent (nominal rate) - 3 percent (inflation rate) = 3 percent (real rate of interest).

Question 9

The greater the interest rate,

Accepted Answer

The answer of The greater the interest rate,
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Question 10

If the annual interest rate remains unchanged over the next two years, and the present value of $120 to be received one year from now is $100, what will $100 be worth two years from now?

Accepted Answer

If the present value of $120 to be received one year from now is $100, it means the interest rate is 20%. Therefore, $100 will be worth $120 after one year. 
Since the interest rate is assumed to remain the same over the next two years, the value of $120 after the first year will be worth $144 after the second year (20% of $120 is $24, so $120 + $24 = $144).

Question 11

What is the real (adjusted for inflation) present value of $104.25 that you could receive one year from now, given that the rate of interest is 4.25 percent and the anticipated rate of inflation is 1 percent?

Accepted Answer

First, we need to calculate the inflation-adjusted amount of $104.25 one year from now. This is done by dividing 104.25 by (1 + the anticipated rate of inflation) which is (1 + 0.01) = 1.01. So, the inflation-adjusted amount is 104.25/1.01 = $103.22.

Next, we need to calculate the present value of $103.22, taking into account the interest rate of 4.25 percent. This is done using the following formula:

Present Value = Future Value / (1 + Interest Rate)^n

where n is the number of years. In this case, n = 1.

Present Value = 103.22 / (1 + 0.0425)^1

Present Value = 98.37

Therefore, the real present value of $104.25 one year from now is $98.37, which is closest to option B ($100.97).

Question 12

The higher the expected rate of inflation,

Accepted Answer

According to the Fisher effect, which is an economic theory, the nominal interest rate is the sum of the real rate of interest and the expected rate of inflation. Therefore, if the expected rate of inflation is higher, the nominal rate of interest would also be higher.

Question 13

A firm is considering three projects. Each costs $1 million now. Project A will yield $400,000 a year for three years, beginning one year from now. Project B will yield $1.25 million three years from now, and Project C will yield $600,000 for two years, beginning two years from now. If the interest rate is 8 percent, which of these projects should the firm undertake?

Accepted Answer

The present value of Project A's cash flows is higher than the initial investment when discounted at 8%, making it the most viable option.

Question 14

The greater the risk of nonrepayment of a loan, other things being equal

Accepted Answer

The higher the risk of non-repayment, lenders will charge a higher rate of interest to compensate for the potential loss.

Question 15

The present value of a sum to be received in the future is greater

Accepted Answer

The present value of a future sum increases as the time period before receiving that sum decreases, because there is less time for the value to be discounted. Higher interest or discount rates actually decrease the present value, as they increase the rate at which future values are discounted back to the present. Inflation rate is not directly related to the calculation of present value in the context of this question.

Question 16

The difference between the nominal rate of interest and the real rate of interest is

Accepted Answer

The nominal rate of interest is the stated rate of interest which does not take into account the impact of inflation. The real rate of interest, on the other hand, is the actual rate of return earned after adjusting for inflation. Therefore, the difference between the nominal rate of interest and the real rate of interest is the anticipated rate of inflation.

Question 17

Present value is

Accepted Answer

Present value is the value of a future cash flow in today's dollars. It takes into account the time value of money, meaning that money is worth more in the present than in the future due to inflation and the potential to earn interest. As a result, the longer the time horizon or delay in receiving the cash flow, the lower the present value.

Question 18

A firm is considering an investment that will cost $2 million today and $2 million a year from now. It will generate revenues of $1 million a year for five years, beginning two years from now. If the interest rate is 10 percent, the firm should

Accepted Answer

To determine whether the investment is profitable, we need to find the present value of the net revenues and compare it to the present value of the investment.

The net revenues are $1 million per year for five years, starting in two years, so we need to find the present value of an annuity with $1 million payments for five years, starting in two years. Using a financial calculator or spreadsheet, we find that the present value of this annuity is $3,791,416.

The total cost of the investment is $4 million ($2 million today and $2 million in one year), so the present value of this cost is $3,636,363.

Therefore, the present value of the net revenues is less than the present value of the investment spending, so the firm should not make the investment. The correct answer is A.

Question 19

A star basketball player signs a contract that newspaper reports say is worth $20 million. The player receives $5 million on signing, and $5 million a year for three years. The contract is worth

Accepted Answer

The present value of future payments is less than their nominal value due to the time value of money, making the contract worth less than $20 million.

Question 20

Assuming a market rate of interest equal to 7 percent, what is the present value of $200 to be received one year from today?

Accepted Answer

PV = FV / (1 + i)^n
PV = $200 / (1 + 0.07)^1
PV = $187.38 (rounded to nearest cent)
Therefore, the present value of $200 to be received one year from today is $187 (approximately). The closest option is C.

Quiz 21: Rents, Profits, and the Financial Environment of Business