Question 1

Calculate the internal rate of return for a machine that costs $500,000 and provides annual revenue of $115,000 per year for 5 years.You can assume all revenue is received once a year at the end of the year.

Accepted Answer

The answer of Calculate the internal rate of return for...

Question 2

We should expect a country that experiences volatile inflation to also have:
A)volatile nominal interest rates.
B)volatile real interest rates but stable nominal rates.
C)stable nominal interest rates.
D)volatile real interest rates.

Accepted Answer

When a country experiences volatile inflation, it is likely that the central bank will adjust nominal interest rates in order to stabilize the economy. As a result, nominal interest rates will be volatile, as they are tied to inflation. Real interest rates, which subtract inflation from nominal rates, may be volatile if inflation is volatile, but they can also be stable if inflation is averaging out over time. Therefore, the best choice is A, as volatile inflation will lead to volatile nominal interest rates.

Question 3

Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.

Accepted Answer

The answer of Compute the future value of $1,000 at...

Question 4

What is the monthly interest rate if you are asked to convert a 12 percent annual rate to a monthly rate (calculate to 4 decimal places)?

Accepted Answer

The answer of What is the monthly interest rate if...

Question 5

Convert each of the following basis points amounts to percents:
a) 412.5
b) 10
c) 125.7
d) 1075
e) 1

Accepted Answer

The answer of Convert each of the following basis points...

Question 6

You win your state lottery.The lottery officials offer you the following options: you can accept annual payments of $50,000 for 20 years or receive an upfront payment of $700,000.Ignoring issues like mortality tables, taxes, etc.; and assuming the first payment is made immediately, what market interest rate would make it more attractive to take the upfront payment?

Accepted Answer

The answer of You win your state lottery.The lottery officials...

Question 7

Compute the interest rate for a $1,000 face value a bond that sells for $280 and matures in 20 years.The bond has no coupon payments, only the face value payment.

Accepted Answer

The answer of Compute the interest rate for a $1,000...

Question 8

A bond offers a $50 coupon, has a face value of $1,000, and has 10 years to maturity.If the interest rate is 4.0% what is the value of this bond?

Accepted Answer

The answer of A bond offers a $50 coupon, has...

Question 9

Briefly discuss the relationship between present value and each of the following:
a) future value
b) time
c) interest rate

Accepted Answer

The answer of Briefly discuss the relationship between present value...

Question 10

Calculate which has a higher present value: an annual payment of $100 received over 3 years or an annual payment of $50 received over 7 years.In both cases the interest rate is 7% (or 0.07).

Accepted Answer

The answer of Calculate which has a higher present value:...

Question 11

From the Fisher equation we see that the nominal interest rate and expected inflation have:
A)an inverse relationship.
B)a relationship which is direct but less than one-to-one.
C)a relationship which is direct and one-to-one.
D)no relationship.

Accepted Answer

The Fisher equation posits that the nominal interest rate is equal to the real interest rate plus the expected inflation rate, implying a direct and one-to-one relationship between nominal interest rates and expected inflation.

Question 12

What will be the amount owed at the end of one year if a borrower charges $100 on his/her credit card and doesn't make any payments during the year (assume the interest rate is 1.5% per month)?

Accepted Answer

The answer of What will be the amount owed at...

Question 13

Suppose that you have a winning lottery ticket for $100,000.The State of California doesn't pay this amount up front - this is the amount you will receive over time.The State offers you two options.The first pays you $80,000 up front and that will be the entire amount.The second pays you winnings over a three year period.The last option pays you a large payment today with small payments in the future.The payment options are detailed in the table below:

Accepted Answer

The answer of Suppose that you have a winning lottery...

Question 14

Using the rule of 72, determine the approximate time it will take $1000 to double given the following interest rates.
a) 5.5%
b) 10.0%
c) 30.0%
d) 2.0%
e) 4.5%

Accepted Answer

The answer of Using the rule of 72, determine the...

Question 15

Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

Accepted Answer

The answer of Considering the concept of compounding, explain why...

Question 16

Which investment plan will provide the highest future value: $500 invested at 5 percent annually for four years and then that balance invested at 7 percent annually for an additional three years, or $500 invested at 6 percent annually for seven years?

Accepted Answer

The answer of Which investment plan will provide the highest...

Question 17

An investment grows from $2,000 to $2,750 over the period of 10 years.What average annual growth rate will produce this result?

Accepted Answer

The answer of An investment grows from $2,000 to $2,750...

Question 18

If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that:
A)is at least 7%.
B)is anything above 0%.
C)equals the real rate desired plus expected inflation.
D)equals the real rate desired less expected inflation.

Accepted Answer

To earn a real interest rate of 3% when inflation is also expected to be 3%, the lender should charge a nominal interest rate that equals the real rate desired plus the expected inflation. Therefore, the nominal interest rate should be 6%.

Question 19

You are considering purchasing a home.You find one that you like but you realize that you will need to obtain a mortgage for $100,000.The mortgage company presents you with two options: a 15-year mortgage at a 6.0% annual rate and a 30-year mortgage at a 6.5% annual rate.What will be the fixed annual payment for each mortgage?

Accepted Answer

The answer of You are considering purchasing a home.You find...

Question 20

A lender expects to earn a real interest rate of 4.5% over the next 12 months.She charges a 9.25% (annual) nominal rate for a 12-month loan.What inflation rate is she expecting? If the lender is in a 30% marginal tax bracket, the borrower in a 25% marginal tax bracket, and they both have the same inflation expectations, what are the real after-tax rates each expects?

Accepted Answer

The answer of A lender expects to earn a real...

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

Calculate the internal rate of return for a machine that costs $500,000 and provides annual revenue of $115,000 per year for 5 years.You can assume all revenue is received once a year at the end of the year.

We should expect a country that experiences volatile inflation to also have:

Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.

What is the monthly interest rate if you are asked to convert a 12 percent annual rate to a monthly rate (calculate to 4 decimal places)?

Convert each of the following basis points amounts to percents: a) 412.5 b) 10 c) 125.7 d) 1075 e) 1

Compute the interest rate for a $1,000 face value a bond that sells for $280 and matures in 20 years.The bond has no coupon payments, only the face value payment.

A bond offers a $50 coupon, has a face value of $1,000, and has 10 years to maturity.If the interest rate is 4.0% what is the value of this bond?

Briefly discuss the relationship between present value and each of the following: a) future value b) time c) interest rate

Calculate which has a higher present value: an annual payment of $100 received over 3 years or an annual payment of $50 received over 7 years.In both cases the interest rate is 7% (or 0.07).

From the Fisher equation we see that the nominal interest rate and expected inflation have:

What will be the amount owed at the end of one year if a borrower charges $100 on his/her credit card and doesn't make any payments during the year (assume the interest rate is 1.5% per month)?

Using the rule of 72, determine the approximate time it will take $1000 to double given the following interest rates. a) 5.5% b) 10.0% c) 30.0% d) 2.0% e) 4.5%

Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

Which investment plan will provide the highest future value: $500 invested at 5 percent annually for four years and then that balance invested at 7 percent annually for an additional three years, or $500 invested at 6 percent annually for seven years?

An investment grows from $2,000 to $2,750 over the period of 10 years.What average annual growth rate will produce this result?

If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that: