Question 1

If you want to know the present value of a future payment received in one year, what formula can you use?

Accepted Answer

The formula for present value of a future payment received in one year is to divide the future payment by one plus the rate of interest. This takes into account the time value of money and discounts the future payment to its present value.

Question 2

A monopsony restricts the quantity of a factor demanded to force down the price of the factor and increase profits.

Accepted Answer

In a monopsony market, there is only one buyer for a particular factor of production. This gives the buyer market power to restrict the quantity of the factor demanded, which can lead to a decrease in the price paid for the factor. By paying a lower price for the factor, the monopsonist can increase its profits. Therefore, the statement is true.

Question 3

If you own a $1000 face value bond with one year remaining to maturity and a 3 per cent interest rate, and new bonds are paying 14 per cent, what is the most you can get for your old bond?

Accepted Answer

To calculate the most you can get for your old bond, you need to find the present value of the bond using the new interest rate of 14%. 
PV = FV/(1+r)^n, where FV is the face value of the bond, r is the interest rate, and n is the number of years remaining to maturity. 
PV = 1000/(1+0.14)^1 
PV = $903.51 
Therefore, the most you can get for your old bond is $903.51, option A is correct.

Question 4

If a stock's dividend is expected to grow at a constant rate of eight per cent in the future and it has just paid a dividend of $1.25 a share, and you have an alternative investment of equal risk that will earn a 12 per cent rate of return, what would you be willing to pay per share for this stock?

Accepted Answer

To find the price per share that we would be willing to pay for the stock, we can use the constant growth dividend valuation model:

P = D/(r-g)

where P is the price per share, D is the most recent dividend per share, r is the required rate of return, and g is the expected growth rate of the dividend.

In this case, D = $1.25, g = 8%, and r = 12%. Plugging these values into the formula, we get:

P = $1.25/(0.12 - 0.08) = $31.25

Therefore, we would be willing to pay $31.25 per share for this stock. Option A is the correct answer.

Question 5

What is the present value of $888 in a one year if the current rate of interest is five per cent?

Accepted Answer

Using the formula for present value, 
PV = FV / (1 + r)^n 
PV = 888 / (1 + 0.05)^1 
PV = $845.71

Question 6

How much is a bond that pays $20 in interest payments for 4 years and $1000 at the end of the fourth year worth if the interest rate is 5%?

Accepted Answer

To find the present value of the bond, we need to calculate the present value of the interest payments and the present value of the principal payment.

Present value of interest payments:

PV = C*[1-(1+r)^(-n)]/r
PV = 20*[1-(1+0.05)^(-4)]/0.05
PV = $72.31

Present value of principal payment:

PV = FV/(1+r)^n
PV = 1000/(1+0.05)^4
PV = $822.62

Total present value of the bond:

PV = $72.31 + $822.62
PV = $894.93

Therefore, the bond is worth $894.93, which is closest to option B) $893.62.

Question 7

The present value of $475 received 3 years in the future would be calculated as which of the following when the interest rate is 6 per cent?

Accepted Answer

The present value formula is PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years. Plugging in the values, we get PV = 475 / (1 + 0.06)^3 = 399.84. Therefore, the correct answer is B, which is the present value formula with the given values plugged in.

Question 8

The supply curve of a uniquely talented actor or superstar athlete will be perfectly inelastic.

Accepted Answer

The supply of a uniquely talented actor or superstar athlete is limited to that individual, hence the supply curve will be perfectly inelastic. This means that the quantity supplied will remain the same regardless of changes in price.

Question 9

The present value of $300 received 5 years in the future would be calculated as which of the following when the interest rate is 5%?

Accepted Answer

The formula for present value is Future Value/(1+interest rate)^number of years. Plugging in the values, we get 300/(1.05)^5 which simplifies to approximately $231.80. Choice B is the correct calculation of this formula.

Question 10

The value you give today to money you will receive in the future is called the future payment's

Accepted Answer

The value you give today to money you will receive in the future is called present value. It is important to understand present value when making financial decisions and calculating things like loans or investments.

Question 11

A monopsony is a term used to refer to a firm that is the sole seller of a good or service.

Accepted Answer

A monopsony is a firm that is the sole buyer of a good or service, not the sole seller.

Question 12

If you own a $1000 face value bond with one year remaining to maturity and a five per cent interest rate, and new bonds are paying 12 per cent, what is the most you can get for your old bond?

Accepted Answer

Since the bond is only one year away from maturity, it is essentially a one-year, five per cent bond. To calculate the new price of the bond, we need to discount the remaining payments at the current market rate of 12 per cent. Using the formula for present value of a single sum, we get:

PV = FV / (1 + r)^n
PV = 50 / (1 + 0.12)^1
PV = $44.64

Adding the discounted interest payment of $50 to the discounted principal of $944.64 gives a total value of $994.64, which is the most you can get for your old bond. However, this assumes no transaction costs or other factors that may affect the price. Therefore, the closest answer choice is C) $937.50.

Question 13

What is the formula you should use to determine a bank account's future value in one year?

Accepted Answer

This formula is known as the compound interest formula and is used to find the future value of an investment or bank account. It takes into account the present value (the original amount of money), the interest rate (expressed as a decimal), and the length of time (in this case, one year). By multiplying the present value by (1 + interest rate), we calculate the future value.

Question 14

If a stock's dividend is expected to grow at a constant rate of 6 per cent in the future and it has just paid a dividend of $3.00 per share, and you have an alternative investment of equal risk that will earn a 9 per cent rate of return, what would you be willing to pay per share for this stock?

Accepted Answer

To calculate the fair value of the stock using the dividend growth model, we can use the formula:

P = D/(r-g),

where:
P = the fair value of the stock
D = the most recent dividend payment
r = the required rate of return (in this case, 9%)
g = the expected constant growth rate of dividends (in this case, 6%)

Plugging in the numbers:

P = $3.00/(0.09 - 0.06) = $3.00/0.03 = $100

So the fair value of the stock is $100 per share. Since we want to pay less than the fair value, the best choice is D, where the stock is priced at $106 per share.

Question 15

What is the present value of $575 in a one year if the current rate of interest is 4 per cent?

Accepted Answer

The present value (PV) can be calculated using the formula: PV = FV / (1 + r)^n, where FV is the future value ($575), r is the interest rate (4% or 0.04), and n is the number of periods (1 year). Plugging in the values: PV = $575 / (1 + 0.04)^1 = $575 / 1.04 = $552.88.

Question 16

The market price of a factor of production that is in fixed supply is determined only by demand.

Accepted Answer

If the supply of a factor of production is fixed, it means that the quantity of that factor cannot be increased. Therefore, the market price for that factor will be determined solely by demand, as suppliers cannot increase the quantity of the factor to meet any excess demand.

Question 17

The price of a financial asset should be equal to

Accepted Answer

The correct pricing of a financial asset takes into account the present value of all future payments to be received from owning that asset. Therefore, the price of a financial asset should be equal to the present value of those payments. Choice D accurately reflects this principle. Choices A, B, and C do not consider all future payments and are therefore incorrect.

Question 18

How much is a bond that pays $50 in coupon payments for 3 years and $1000 at the end of the third year worth if the interest rate is 10%?

Accepted Answer

The answer of How much is a bond that pays...

Question 19

Economic rent refers to the price of a factor of production which is fixed in supply.

Accepted Answer

Economic rent is the price paid for a factor of production (such as land or a specialized skill) that is limited in supply and cannot be easily replicated. This makes it different from normal profit, which can be earned by anyone who enters a market and competes effectively for customers.

Question 20

Why is a dollar today more valuable than a dollar a year from now?

Accepted Answer

All of these reasons contribute to the concept that a dollar today is more valuable than a dollar in the future. Immediate utility, inflation reducing future purchasing power, and the risk associated with the future all support the time value of money principle.

Quiz 12: The Markets for Labour and Other Factors of Production