Question 1

A 15-payment annual annuity has its first payment in nine years. If the payment amount is $1,400 and the interest rate is 7 percent,what is the most you should be willing to pay today for this investment?
A)$6,416.67
B)$12,751.08
C)$6,935.74
D)$5,825.11
E)$7,421.24

Accepted Answer

The answer of A 15-payment annual annuity has its first...

Question 2

Classify each of the following in terms of their effect on interest rates (increase or decrease):
I. Covenants on borrowing become more restrictive.
II. The Federal Reserve increases the money supply.
III. Total household wealth increases.
A)I increases,II increases,III increases
B)I increases,II decreases,III decreases
C)I decreases,II increases,III increases
D)I decreases,II decreases,III decreases
E)None of the options

Accepted Answer

The answer of Classify each of the following in terms...

Question 3

Upon graduating from college this year,you expect to earn $25,000 per year. If you get your MBA,in one year you can expect to start at $35,000 per year. Over the year,inflation is expected to be 5 percent. In today's dollars,how much additional (less)money will you make from getting your MBA (to the nearest dollar)in your first year?
A)$10,000
B)$8,750
C)$8,333
D)-$2,462
E)$9,524

Accepted Answer

Without getting an MBA, the expected salary is $25,000. With an MBA, the expected salary is $35,000, which is a difference of $10,000. However, due to inflation, the value of money decreases by 5%, so in today's dollars, the additional money made from getting an MBA is $10,000 / (1+0.05) = $9,523.81, which rounds to $8,333. Therefore, the best choice is C.

Question 4

An investment pays $400 in one year,X amount of dollars in two years,and $500 in three years. The total present value of all the cash flows (including X)is equal to $1,500. If i is 6 percent,what is X?
A)$749.67
B)$789.70
C)$600.00
D)$822.41
E)$702.83

Accepted Answer

To find the value of X, we need to use the present value formula:
PV = CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3

where PV is the total present value, CF is the cash flow at each time period, and i is the interest rate.

Substituting the given values, we get:

1500 = 400 / (1+0.06)^1 + X / (1+0.06)^2 + 500 / (1+0.06)^3

Solving for X, we get:

X = (1500 - 400 / (1+0.06)^1 - 500 / (1+0.06)^3) * (1+0.06)^2

X = $789.70

Therefore, the best choice is B, $789.70.

Question 5

According to the liquidity premium theory of interest rates,
A)long-term spot rates are totally unrelated to expectations of future short-term rates.
B)the term structure must always be upward sloping.
C)investors prefer certain maturities and will not normally switch out of those maturities.
D)long-term spot rates are higher than the average of current and expected future short-term rates.
E)investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates.

Accepted Answer

The liquidity premium theory of interest rates posits that long-term spot rates are higher than the average of current and expected future short-term rates, due to the premium that investors demand for holding longer-term bonds that are less liquid than shorter-term bonds. The theory does not require a specific shape for the term structure, nor does it assume that investors are entirely indifferent between different maturities.

Question 6

Which of the following would normally be expected to result in an increase in the supply of funds,all else equal?
I. The perceived riskiness of all investments decreases.
II. Expected inflation increases.
III. Current income and wealth levels increase.
IV. Near term spending needs of households increase as energy costs rise.
A)II and III only
B)I and IV only
C)I,II,III,and IV
D)I and III only
E)II,III,and IV only

Accepted Answer

I. The perceived riskiness of all investments decreases - this would not necessarily result in an increase in the supply of funds, as investors may simply choose to hold onto their funds rather than invest them in riskier assets.

II. Expected inflation increases - this would lead to an increase in the supply of funds, as investors may choose to save more in anticipation of higher prices in the future.

III. Current income and wealth levels increase - this would also lead to an increase in the supply of funds, as households may have more disposable income to save or invest.

IV. Near term spending needs of households increase as energy costs rise - this would not result in an increase in the supply of funds, as households may have to cut back on savings or investments in order to cover their increased expenses.

Question 7

YIELD CURVE FOR ZERO COUPON BONDS RATED AA  Assume that there are no liquidity premiums. To the nearest basis point,what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?
A)9.96 percent
B)10.41 percent
C)10.05 percent
D)10.56 percent
E)9.16 percent

Accepted Answer

To determine the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today, we first need to identify the four-year maturity point on the yield curve. From the graph, we can see that the four-year maturity point falls between 8.5% and 12%, closer to 12%. We also know that there are no liquidity premiums, so the expected interest rate is equal to the four-year spot rate. Therefore, the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today would be approximately 10.41%, which is the closest option to our estimate.

Question 8

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N= FV,the i you get will be
A)the rate per compounding period.
B)the EYE.
C)the bond equivalent yield.
D)the TOE.
E)the EAR.

Accepted Answer

The answer of If M > 1 and you solve...

Question 9

You buy a car for $38,000. You agree to a 60-month loan with a monthly interest rate of 0.55 percent. What is your required monthly payment?
A)$634.24
B)$745.29
C)$605.54
D)$764.07
E)None of the options

Accepted Answer

The monthly payment can be calculated using the formula for an amortizing loan: P = [r*PV] / [1 - (1 + r)^-n], where P is the monthly payment, r is the monthly interest rate (0.55% or 0.0055), PV is the present value or loan amount ($38,000), and n is the number of payments (60). Plugging in these values gives a monthly payment of approximately $745.29.

Question 10

Inflation causes the demand curve for loanable funds to shift to the _____ and causes the supply curve to shift to the _____.
A)left; right
B)left; left
C)right; left
D)right; right

Accepted Answer

The answer of Inflation causes the demand curve for loanable...

Question 11

Of the following,the most likely effect of an increase in income tax rates would be to
A)decrease the savings rate.
B)decrease the supply of loanable funds.
C)increase interest rates.
D)All of the options.

Accepted Answer

An increase in income tax rates would likely decrease disposable income and thus reduce the ability of households to save. This would lead to a decrease in the savings rate, which in turn reduces the supply of loanable funds. The decrease in the supply of loanable funds would increase the demand for loanable funds, leading to an increase in interest rates. Therefore, all of the options listed are likely effects of an increase in income tax rates.

Question 12

An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2 percent. Which statement(s)below is/are true?
I. 4 percent is the desired real risk-free interest rate.
II. 6 percent is the approximate nominal rate of interest required.
III. 2 percent is the expected inflation rate over the period.
A)I only
B)II only
C)III only
D)I and II only
E)I,II,and III are true

Accepted Answer

The investor wants a real increase in purchasing power of 4%, which is the desired real risk-free interest rate (I). With expected inflation at 2% (III), the nominal rate needed to achieve this real increase, using the approximation formula (1 + real rate) * (1 + inflation rate) - 1, is about 6% (II).

Question 13

An annuity and an annuity due with the same number of payments have the same future value if r = 10%. Which one has the higher payment?
A)An annuity and an annuity due cannot have the same future value.
B)There is no way to tell which has the higher payment.
C)The annuity due has the higher payment.
D)They both must have the same payment since the future values are the same.
E)The annuity has the higher payment.

Accepted Answer

An annuity due has payments at the beginning of each period, so it accumulates more interest over time compared to an ordinary annuity with the same payment. Therefore, for both to have the same future value, the annuity must have a higher payment.

Question 14

Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to ______________ (to the nearest penny).
A)-$3,094.67
B)$3,094.67
C)$1,643.32
D)$2,500.00
E)-$2,500.00

Accepted Answer

The answer of Investment A pays 8 percent simple interest...

Question 15

An insurance company is trying to sell you a retirement annuity. The annuity will give you 20 payments with the first payment in 12 years when you retire. The insurance firm is asking you to pay $50,000 today. If this is a fair deal,what must the payment amount be (to the dollar)if the interest rate is 8 percent?
A)$9,472
B)$10,422
C)$12,824
D)$5,093
E)$11,874

Accepted Answer

The answer of An insurance company is trying to sell...

Question 16

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent,what was the investor's actual real after-tax rate of return?
A)-0.36 percent
B)0.66 percent
C)2.64 percent
D)0.72 percent
E)1.45 percent

Accepted Answer

The real after-tax rate of return is the nominal return minus the inflation rate and the taxes on the return. In this case, the nominal return is 4%, the inflation rate is 3%, and the taxes are 28% federal and 6% state and local, for a total of 34%. So the real after-tax rate of return is 4% - 3% - 34% * (4% - 3%) = 0.36%.

Question 17

Classify each of the following in terms of their effect on interest rates (increase or decrease):
I. Perceived risk of financial securities increases.
II. Near term spending needs decrease.
III. Future profitability of real investments increases.
A)I increases,II increases,III increases
B)I increases,II decreases,III decreases
C)I decreases,II increases,III increases
D)I decreases,II decreases,III decreases
E)None of the options

Accepted Answer

The answer of Classify each of the following in terms...

Question 18

You want to have $5 million when you retire in 40 years. You believe you can earn 9 percent per year on your investment. How much must you invest each year to achieve your goal when you retire? (Ignore all taxes.)
A)$10,412
B)$11,619
C)$14,798
D)$15,295
E)None of the options

Accepted Answer

The problem can be solved using the formula for future value of an annuity:

FV = PMT x ((1 + r)^n - 1) / r

where FV is the future value, PMT is the annual investment amount, r is the interest rate per period (in this case, per year), and n is the number of periods (in this case, the number of years until retirement).

Plugging in the values given:

FV = $5,000,000
r = 9% = 0.09
n = 40

$5,000,000 = PMT x ((1 + 0.09)^40 - 1) / 0.09

Solving for PMT:

PMT = $14,798.38

Therefore, option C is the correct answer - you would need to invest $14,798.38 each year for 40 years to achieve your retirement goal.

Question 19

YIELD CURVE FOR ZERO COUPON BONDS RATED AA  Assume that there are no liquidity premiums. You just bought a 15-year maturity Xerox corporate bond rated AA with a 0 percent coupon. You expect to sell the bond in eight years. Find the expected interest rate at the time of sale (watch out for rounding error).
A)8.85 percent
B)11.00 percent
C)12.80 percent
D)13.92 percent
E)12.49 percent

Accepted Answer

The answer of YIELD CURVE FOR ZERO COUPON BONDS RATED...

Question 20

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?
A)Newly expected decline in the value of the dollar
B)Increases in the U.S. government budget deficit
C)Decreased Japanese purchases of U.S. Treasury bills/bonds
D)An increase in current and expected future returns of real corporate investments
E)A decrease in U.S. inflationary expectations

Accepted Answer

A decrease in inflationary expectations would lead to a decrease in bond yields as investors would demand lower compensation for expected inflation.

Quiz 2: Determinants of Interest Rates

A 15-payment annual annuity has its first payment in nine years. If the payment amount is $1,400 and the interest rate is 7 percent,what is the most you should be willing to pay today for this investment?

Classify each of the following in terms of their effect on interest rates (increase or decrease) : I. Covenants on borrowing become more restrictive. II. The Federal Reserve increases the money supply. III. Total household wealth increases.

An investment pays $400 in one year,X amount of dollars in two years,and $500 in three years. The total present value of all the cash flows (including X) is equal to $1,500. If i is 6 percent,what is X?

According to the liquidity premium theory of interest rates,

YIELD CURVE FOR ZERO COUPON BONDS RATED AA Assume that there are no liquidity premiums. To the nearest basis point,what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M) ) M*N= FV,the i you get will be

You buy a car for $38,000. You agree to a 60-month loan with a monthly interest rate of 0.55 percent. What is your required monthly payment?

Inflation causes the demand curve for loanable funds to shift to the _ and causes the supply curve to shift to the _.

Of the following,the most likely effect of an increase in income tax rates would be to

An annuity and an annuity due with the same number of payments have the same future value if r = 10%. Which one has the higher payment?

Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to ______________ (to the nearest penny) .

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent,what was the investor's actual real after-tax rate of return?

Classify each of the following in terms of their effect on interest rates (increase or decrease) : I. Perceived risk of financial securities increases. II. Near term spending needs decrease. III. Future profitability of real investments increases.

You want to have $5 million when you retire in 40 years. You believe you can earn 9 percent per year on your investment. How much must you invest each year to achieve your goal when you retire? (Ignore all taxes.)

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following?