Question 1

Assume you borrow $500 from a payday lender.The terms are that you must pay a fee of $75 in advance (today)and one year from now you need to repay $750.What implied interest rate are you paying?

Accepted Answer

The implied interest rate can be calculated by considering the initial amount borrowed and the total amount to be repaid. Here, you effectively borrow $425 ($500 - $75 fee) and agree to repay $750 in a year. The interest paid is $325 ($750 - $425), so the interest rate is $325/$425 = 76.47%.

Question 2

Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum.She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off.How much will you owe if you wait until year 3 to pay off the loan?

Accepted Answer

The answer of Assume that you borrow $2,000 from your...

Question 3

You are considering an investment that is expected to pay 5 percent in year 1,7 percent in years 2 and 3 and 9 percent in year 4.If you invest $2,000 today,what will this investment be worth at the end of the fourth year?

Accepted Answer

The answer of You are considering an investment that is...

Question 4

Your firm receives an offer from the supplier who provides computer chips used to manufacture cell phones.Due to poor planning,the supplier has an excess amount of chips and is willing to sell $600,000 worth of chips for only $500,000.You already have two years' supply on hand.It would cost you $7,500 today to store the chips until your firm needs them in two years.What implied interest rate would you be earning if you purchased and store the chips?

Accepted Answer

The answer of Your firm receives an offer from the...

Question 5

You have $50,000 in your account.Assuming no additional deposits are made and your account earns 8 percent per year,how long will it take for the account to have a balance of $500,000?

Accepted Answer

We can use the formula for compound interest:

A = P(1 + r/n)^(nt)

where A is the amount, P is the principal (starting amount), r is the annual interest rate (as a decimal), n is the number of times the interest is compounded per year, and t is the time (in years).

Plugging in the values given in the problem:

500,000 = 50,000(1 + 0.08/1)^(1t)

Simplifying:

10 = (1.08)^t

Taking the natural log of both sides:

ln(10) = t(ln(1.08))

Solving for t:

t = ln(10) / ln(1.08)

t ≈ 29.92 years

Therefore, the answer is B) 29.92 years.

Question 6

You invested $1,000 for 5 years in an account that earns 5 percent.However,today you learn that you are able to move the account into an investment that earns 10 percent.Which of the following statements is correct?

Accepted Answer

If you leave the money in the original account for the full 5 years, it will earn: 
$1,000 x 5 years x 5% per year = $250 in interest

If you move the money to the new account earning 10%, it will earn: 
$1,000 x 5 years x 10% per year = $500 in interest

Therefore, by selecting the investment earning 10 percent, you will more than double your profit.

Question 7

Assume you borrow $100 from a payday lender.The terms are that you must pay a fee of $25 in advance (today)and one year from now you need to repay $112.What implied interest rate are you paying?

Accepted Answer

The total amount you will pay back is $112 + $25 = $137. 
The interest paid is $137 - $100 = $37.
The implied interest rate can be calculated as:
Interest rate = (Interest paid / Amount borrowed) x 100
= (37 / 100) x 100
= 37%
Therefore, you are paying an implied interest rate of 37% on this payday loan, which is option C (49.33% is incorrect because it assumes the fee is only for one month, not upfront).

Question 8

You borrow $3,500 and will pay back the entire amount in 5 years.You are charged 9 percent interest per year.How much interest do you pay on this loan?

Accepted Answer

The answer of You borrow $3,500 and will pay back...

Question 9

Which of the following statements is incorrect with respect to time lines?

Accepted Answer

Interest rates are typically included on time lines, either as part of cash flows or as a discount rate to calculate present values.

Question 10

How long will it take for the purchasing power of $1 to be cut in half if inflation is 4 percent?

Accepted Answer

The answer of How long will it take for the...

Question 11

You have $100,000 in your account.Assuming no additional deposits are made and your account earns 15 percent per year,how long will it take for the account to have a balance of $500,000?

Accepted Answer

The answer of You have $100,000 in your account.Assuming no...

Question 12

Suppose a U.S.Treasury bond promises to pay $9,780.13 in three years.If bonds of this type are generating a 4 percent annual return,how much would you pay for this bond today?

Accepted Answer

The present value of the bond can be calculated using the formula:

Present Value = Future Value / (1 + interest rate)^n

where n is the number of years.

Plugging in the values, we get:

Present Value = $9,780.13 / (1 + 0.04)^3

Present Value = $8,694.50

Therefore, the best choice is C.

Question 13

You are considering an investment that is expected to pay 3 percent in year 1,5 percent in years 2 and 3 and 7 percent in year 4.If you invest $1,000 today,what will this investment be worth at the end of the fourth year?

Accepted Answer

The answer of You are considering an investment that is...

Question 14

You double your money in 5 years.The reason your return is not 20 percent per year is because:

Accepted Answer

If you double your money in 5 years, then your annualized return is about 14.87%. This is less than 20% because the return is not compounded annually but rather over the 5-year period. Compounding would result in a higher annualized return.

Question 15

Five years ago,sales were $4 million.Today your company's sales are $10 million.What annual rate have sales been growing?

Accepted Answer

The answer of Five years ago,sales were $4 million.Today your...

Question 16

Which of the following statements is correct?

Accepted Answer

$100 to be received in the future is worth less than that today due to the potential of current funds to be invested and earn interest, a concept known as the time value of money.

Question 17

You borrow $10,000 and will pay back the entire amount in 10 years.You are charged 6 percent interest per year.How much interest do you pay on this loan?

Accepted Answer

To find the amount of interest, we can use the formula: 
Interest = Principal x Rate x Time

Where: 
Principal = $10,000 
Rate = 6% per year 
Time = 10 years

So, 
Interest = $10,000 x 0.06 x 10 
Interest = $6,000

Therefore, the amount of interest you pay on this loan is $6,000. 
Option C is the closest value.

Question 18

When your investment compounds,your money will grow in a(n)__________ fashion.

Accepted Answer

When your investment compounds, your money will grow exponentially as the interest earned in each period is added to the principal amount, thus earning interest on interest. This leads to significant growth over time.

Question 19

Which of the following will not increase a present value?

Accepted Answer

The answer of Which of the following will not increase...

Question 20

We call the process of earning interest on both the original deposit and on the earlier interest payments:

Accepted Answer

Compounding is the process of earning interest not only on the original deposit but also on the earlier interest payments. This results in higher returns over time compared to simple interest, which only earns interest on the original amount. Future value and discounting are related to financial calculations but not specifically to the process of earning interest through compounding.

Quiz 4: Time Value of Money

Assume you borrow $500 from a payday lender.The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750.What implied interest rate are you paying?