Question 1

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 refers to earning interest not only on the initial principal, but also on any previously earned interest. This can significantly increase the total amount of interest earned or owed over time.

Question 2

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

Accepted Answer

5.65% can be translated to 0.0565 in decimal form. Therefore, the best choice is D, which is 0.0565.

Question 3

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 4

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 six months 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 present value of the future payment is equal to the face value, so the payment received today would have the same value as the promise of a $100 payment to be received one year from today.

Question 5

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 the future value of an investment is FV = PV (1 + i)n, where PV is the present value, i is the interest rate, and n is the number of periods. In this case, the investment is for two years, so n = 2. The saver receives the future value after two years, which is represented by FV. Therefore, the equation can be rearranged to solve for FV as FV = PV (1 + i)n = PV (1 + i)2. This represents the payment the saver receives for investing their money for two years.

Question 6

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 second year can be calculated as 8% of the initial deposit of $400, which is $32. Therefore, the correct answer is (C) $34.56 as it seems that the options are giving interest based on a compounding frequency of quarterly or monthly payments. However, the question only states that it is an annual interest rate, which means that the correct answer is simply 8% of $400.

Question 7

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 8

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, so the present value of $100 to be received in the future is less than $100.

Question 9

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

PV (1+i)3 represents the future value of the principal amount (PV) plus the interest earned after three years based on the interest rate (i).

Question 10

Suppose that Ray Allen, a basketball player for the Seattle Supersonics, 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. $\begin{array}{lll} 
& \text { Contract \#1 (Seattle) } & \text { Contract \#2 (Portland) } \
\text { Signing bonus (paid today) } & \$ 1 \text { million } & \$ 1 \text { million } \
\text { First-year salary } & \$ 2 \text { million } & \$ 4 \text { million } \
\text { Second-year salary } & \$ 4 \text { million } & \$ 4 \text { million } \
\text { Third-year salary } & \$ 5 \text { million } & \$ 3 \text { million }
\end{array}$ 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

The present value of the Seattle contract is $12.3 million, while the present value of the Portland contract is $11.9 million.

Question 11

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

The future value of $100 at a 5% per year interest rate at the end of one year is calculated as follows: $100 x (1 + 0.05) = $105. Therefore, the best choice is B, which is $105.

Question 12

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 13

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 has been documented in ancient civilizations such as Mesopotamia and Egypt, predating coinage by 2,000 years.

Question 14

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

If the interest rate is zero, the time value of money is not taken into account. Therefore, the value of the $100 payment one year from now is exactly the same as receiving $100 today. Thus, the answer is "Equal in value to receiving $100 today".

Question 15

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 calculating the proceeds a lender receives from a one-year simple loan is principal amount (PV) multiplied by one plus the annual interest rate (i), or PV(1 + i). This represents the total amount to be repaid at the end of the year, including both the principal and the interest. Option A only adds the interest to the principal, while option B divides the future value (FV) by the interest rate, which is not a relevant calculation for this question. Option D divides the principal by the interest rate, which also does not provide an accurate answer.

Question 16

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 need to divide the percentage by 100. Therefore, 5.5% can be expressed as 0.0550.

Question 17

Suppose Tom receives one-year loan from ABC Bank for $5000.00.At the end of the year, Tom repays $5400.00 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 answer of Suppose Tom receives one-year loan from ABC...

Question 18

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 19

Suppose Paul borrows $4000 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

Paul will have to repay the borrowed amount plus the interest, which is calculated as:
Interest = (Principal x Rate x Time)/100
Here, Principal = $4000, Rate = 7% and Time = 1 year
Therefore, Interest = (4000 x 7 x 1)/100 = $280
So, the total amount Paul will have to repay his grandfather is:
4000 + 280 = $4,280
Thus, the best choice is A.

Question 20

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%.

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

Compound interest means that:

Which of the following expresses 5.65%?

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

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

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?

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?

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

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

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

Which of the following expresses 4.85%?

Credit:

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

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 expresses 5.5%?

Suppose Tom receives one-year loan from ABC Bank for $5000.00.At the end of the year, Tom repays $5400.00 to ABC Bank.Assuming the simple calculation of interest, the interest rate on Tom's loan was:

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

Suppose Paul borrows $4000 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 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: