Question 1

Credit:
A)probably came into being at the same time as coinage.
B)predates coinage by 2,000 years.
C)did not exist until the middle ages.
D)first became popular due to the writings of Aristotle.

Accepted Answer

Credit predates coinage by at least 3,000 years, as evidenced by the existence of credit-based transactions in ancient Mesopotamia.

Question 2

Which of the following best expresses the payment a lender receives for lending money for three years?
A)3PV
B)PV(1 + i)3
C)PV/(1 + i)3
D)FV/(1 + i)3

Accepted Answer

The payment a lender receives for lending money for three years is the future value (FV) of the loan, which is the present value (PV) of the loan multiplied by (1 + i)3, where i is the annual interest rate.

Question 3

If a saver has a positive rate of time preference then the present value of $100 to be received 1 year from today is:
A)more than $100.
B)not calculable.
C)less than 100.
D)unknown to the saver.

Accepted Answer

A positive rate of time preference means that the saver values present consumption more than future consumption. Therefore, the saver would discount the future value of $100 and prefer to have a smaller amount of money in the present. Hence, the present value of $100 to be received 1 year from today would be less than $100.

Question 4

A lender is promised a $100 payment (including interest) one year from today.If the lender has a 6% opportunity cost of money, he/she should be willing to accept what amount today?
A)$100.00
B)$106.20
C)$96.40
D)$94.34

Accepted Answer

The correct amount is found by discounting the future payment by the opportunity cost of money, using the formula: Present Value = Future Value / (1 + r)^n, where r is the interest rate and n is the number of periods. Here, it's $100 / (1 + 0.06)^1 = $94.34.

Question 5

An investor deposits $400 into a bank account that earns an annual interest rate of 8%.Based on this information, how much interest will he earn during the second year alone?
A)$25.60
B)$32
C)$34.56
D)$64

Accepted Answer

The interest earned during the first year will be:
400 x 0.08 = $32

Thus, the total amount in the bank account after the first year will be:
400 + 32 = $432

During the second year, the investor will earn interest on this new balance of $432. The interest earned during the second year will be:
432 x 0.08 = $34.56

Therefore, the investor will earn $34.56 in interest during the second year alone. The best choice is C.

Question 6

Suppose that Ray Allen, a basketball player for the Miami Heat, will become a free agent at the end of this NBA season.Suppose that Allen is considering two possible contracts from different teams.Note that the salaries are paid at the end of EACH year.  The interest rate is 10%.Based on this information, which of the following is true?
A)Allen should take the Seattle contract because it has a higher present value.
B)Allen should take the Portland contract because it has a higher present value.
C)Allen is indifferent between the two contracts because they are both worth $12 million.
D)Allen is indifferent between the two contracts because they are both worth $10.9 million.

Accepted Answer

To compare the present values of the two contracts, we need to discount each year's payment using the given interest rate.

For the Seattle contract:

PV = 5/(1+0.1)^1 + 5/(1+0.1)^2 + 5/(1+0.1)^3 + 5/(1+0.1)^4 = $16.01 million

For the Portland contract:

PV = 6/(1+0.1)^1 + 5/(1+0.1)^2 + 1/(1+0.1)^3 = $16.18 million

Therefore, the Portland contract has a higher present value and Allen should choose it.

Question 7

Which of the following expresses 4.85%?
A)0.0485
B)4.850
C)0.00485
D)0.485

Accepted Answer

To express a percentage as a decimal, divide by 100. Thus, 4.85% as a decimal is 4.85/100 = 0.0485.

Question 8

Suppose a family wants to save $60,000 for a child's tuition.The child will be attending college in 18 years.For simplicity, assume the family is saving for a one-time college tuition payment.If the interest rate is 6%, then about how much does this family need to deposit in the bank today?
A)$10,000
B)$21,000
C)$42,000
D)$57,000

Accepted Answer

To find out how much the family needs to deposit today, we use the formula for the present value of a future sum of money, which is $PV = \frac{FV}{(1 + r)^n}$, where PV is the present value, FV is the future value ($60,000), r is the annual interest rate (6% or 0.06), and n is the number of years (18). Plugging in the values, we get $PV = \frac{60,000}{(1 + 0.06)^{18}}$, which calculates to approximately $21,000.

Question 9

Suppose Mary receives an $8,000 loan from First National Bank.Mary repays $8,480 to First National Bank at the end of one year.Assuming the simple calculation of interest, the interest rate on Mary's loan was:
A)8.00%
B)$480
C)6.00%
D)5.66%

Accepted Answer

The interest on Mary's loan can be calculated using the formula:

Interest = Principal x Rate x Time

where Principal is the amount borrowed, Rate is the interest rate and Time is the time period for which the loan was taken.

In this case, the Principal is $8,000, Time is 1 year, and the amount repaid (including interest) is $8,480.

Therefore, Interest = $8,480 - $8,000 = $480

Using the formula for interest, we can find the interest rate as:

Rate = (Interest / Principal) x 100 x (1 / Time)

Substituting the values we get,

Rate = (480 / 8000) x 100 x (1/1) = 6.00%

Hence, the interest rate on Mary's loan was 6.00%.

Question 10

Which of the following best expresses the proceeds a lender receives from a one-year simple loan when the annual interest rate equals i?
A)PV + i
B)FV/i
C)PV(1 + i)
D)PV/i

Accepted Answer

The formula for simple interest on a loan is I = PV * i * t, where PV is the present value or principal, i is the interest rate, and t is the time period. In the case of a one-year loan, t is equal to 1. Therefore, the proceeds received by the lender would be the principal plus the interest earned, or PV + I. Substituting I = PV * i * t = PV * i * 1, we get PV + (PV * i * 1) = PV(1 + i).

Question 11

Which of the following best expresses the payment a saver receives for investing their money for two years?
A)PV + PV
B)PV + PV(1 + i)
C)PV(1 + i)2
D)2PV(1 + i)

Accepted Answer

The formula for calculating the future value (FV) of an investment is FV = PV(1 + i)^n, where PV is the present value or initial investment, i is the interest rate, and n is the number of periods. In this case, we have n = 2 (since the investment is for two years), and we want to find the future value, so we can rearrange the formula as FV = PV(1 + i)^2. Therefore, the payment a saver receives for investing their money for two years is PV times (1 + i) squared.

Question 12

Suppose Paul borrows $4,000 for one year from his grandfather who charges Paul 7% interest.At the end of the year Paul will have to repay his grandfather:
A)$4,280
B)$4,290
C)$4,350
D)$4,820

Accepted Answer

To calculate the amount Paul will have to repay, we need to add the interest to the principal. 
Interest = Principal x Rate x Time
Here, Principal = $4,000, Rate = 7%, Time = 1 year

Interest = $4,000 x 0.07 x 1 = $280
Amount to be repaid = Principal + Interest = $4,000 + $280 = $4,280

Therefore, the correct choice is A) $4,280.

Question 13

Suppose Tom receives a one-year loan from ABC Bank for $5,000.00.At the end of the year, Tom repays $5,400.00 to ABC Bank.Assuming the simple calculation of interest, the interest rate on Tom's loan was:
A)$400
B)8.00%
C)7.41%
D)20%

Accepted Answer

The interest rate is calculated as (Interest / Principal) * 100. Here, the interest is $5,400.00 - $5,000.00 = $400.00. So, the interest rate is ($400 / $5,000) * 100 = 8.00%.

Question 14

Compound interest means that:
A)you get an interest deduction for paying your loan off early.
B)you get interest on interest.
C)you get an interest deduction if you take out a loan for longer than one year.
D)interest rates will rise on larger loans.

Accepted Answer

Compound interest means that interest is earned not only on the principal amount, but also on the accumulated interest. This results in the interest earning "interest on interest," making the total amount of interest earned higher than with simple interest.

Question 15

Which of the following expresses 5.65%?
A)0.565
B)0.00565
C)5.65
D)0.0565

Accepted Answer

To express a percentage as a decimal, you move the decimal point two places to the left. Therefore, 5.65% is equivalent to 0.0565. Choice D is the only option that represents 0.0565.

Question 16

If the interest rate is zero, a promise to receive a $100 payment one year from now is:
A)more valuable than receiving $100 today.
B)less valuable than receiving $100 today.
C)equal in value to receiving $100 today.
D)equal in value to receiving $101 today.

Accepted Answer

Even with a zero interest rate, receiving $100 today or one year from now holds the same monetary value. However, due to the potential for inflation or the opportunity cost of not being able to use the money immediately, in practical terms, people might prefer to have the money now. But strictly from a financial calculation standpoint with a 0% interest rate, the present value of receiving $100 one year from now is equal to receiving $100 today.

Question 17

Farou invests $2,000 at 8% interest.About how long will it take for Farou to double his investment ?
A)4 years
B)5 years
C)8 years
D)9 years

Accepted Answer

The answer of Farou invests $2,000 at 8% interest.About how...

Question 18

Which of the following expresses 5.5%?
A)0.0055
B)5.50
C)0.550
D)0.0550

Accepted Answer

To express a percentage as a decimal, we move the decimal point two places to the left. So, 5.5% would be 0.0550. Therefore, the best choice is D.

Question 19

The future value of $100 at a 5% per year interest rate at the end of one year is:
A)$95.00
B)$105.00
C)$97.50
D)107.50

Accepted Answer

To calculate the future value, we use the formula: FV = PV*(1 + r), where FV is the future value, PV is the present value, and r is the interest rate. Plugging in the given values: FV = 100*(1+0.05) = $105. Therefore, the best choice is B, as it correctly calculates the future value of $100 at a 5% interest rate after one year.

Question 20

A promise of a $100 payment to be received one year from today is:
A)more valuable than receiving the payment today.
B)less valuable than receiving the payment two years from now.
C)equally valuable as a payment received today if the interest rate is zero.
D)not enough information is provided to answer the question.

Accepted Answer

If the interest rate is zero, the time value of money does not come into play, making the promise of a $100 payment one year from today equally valuable as receiving the payment today.

Quiz 4: Future Value, Present Value, and Interest Rates

Credit:

Which of the following best expresses the payment a lender receives for lending money for three years?

If a saver has a positive rate of time preference then the present value of $100 to be received 1 year from today is:

A lender is promised a $100 payment (including interest) one year from today.If the lender has a 6% opportunity cost of money, he/she should be willing to accept what amount today?

An investor deposits $400 into a bank account that earns an annual interest rate of 8%.Based on this information, how much interest will he earn during the second year alone?

Which of the following expresses 4.85%?

Suppose a family wants to save $60,000 for a child's tuition.The child will be attending college in 18 years.For simplicity, assume the family is saving for a one-time college tuition payment.If the interest rate is 6%, then about how much does this family need to deposit in the bank today?

Suppose Mary receives an $8,000 loan from First National Bank.Mary repays $8,480 to First National Bank at the end of one year.Assuming the simple calculation of interest, the interest rate on Mary's loan was:

Which of the following best expresses the proceeds a lender receives from a one-year simple loan when the annual interest rate equals i?

Which of the following best expresses the payment a saver receives for investing their money for two years?

Suppose Paul borrows $4,000 for one year from his grandfather who charges Paul 7% interest.At the end of the year Paul will have to repay his grandfather:

Suppose Tom receives a one-year loan from ABC Bank for $5,000.00.At the end of the year, Tom repays $5,400.00 to ABC Bank.Assuming the simple calculation of interest, the interest rate on Tom's loan was:

Compound interest means that:

Which of the following expresses 5.65%?

If the interest rate is zero, a promise to receive a $100 payment one year from now is:

Farou invests $2,000 at 8% interest.About how long will it take for Farou to double his investment ?

Which of the following expresses 5.5%?

The future value of $100 at a 5% per year interest rate at the end of one year is:

A promise of a $100 payment to be received one year from today is: