Question 1

James offers you $1,000 today or $X in 7 years.If the interest rate is 4.5 percent,then you would prefer to take the $1,000 today if and only if
A) X < 1,045.00.
B) X < 1,188.89.
C) X < 1,266.67.
D) X < 1,360.86.

Accepted Answer

D

Question 2

Suppose you put $500 into a bank account today.Interest is paid annually and the annual interest rate is 5.5 percent.The future value of the $500 is
A) $637.50 after 5 years and $822.09 after 10 years.
B) $637.50 after 5 years and $775.00 after 10 years.
C) $653.48 after 5 years and $854.07 after 10 years.
D) $688.36 after 5 years and $915.56 after 10 years.

Accepted Answer

To find the future value of the $500, we can use the formula:
FV = PV * (1 + r)^n
where:
FV = future value
PV = present value
r = annual interest rate
n = number of years
Plugging in the given values, we get:
FV = 500 * (1 + 0.055)^5 = $653.48 after 5 years
FV = 500 * (1 + 0.055)^10 = $854.07 after 10 years
Therefore, the best choice is C.

Question 3

In which of the following instances is the present value of the future payment the largest?
A) You will receive $1,000 in 5 years and the annual interest rate is 5 percent.
B) You will receive $1,000 in 10 years and the annual interest rate is 3 percent.
C) You will receive $2,000 in 10 years and the annual interest rate is 10 percent.
D) You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

Accepted Answer

The present value of the future payment is largest when the interest rate is higher and the time to receive the payment is shorter. Therefore, option A is the best choice as it has a higher interest rate and shorter time frame than the other options.

Question 4

Janelle offers you $1,000 today or $1,500 in 5 years.You would prefer to take the $1,500 in 5 years if the interest rate is
A) 8 percent.
B) 9 percent.
C) 10 percent.
D) All of the above are correct.

Accepted Answer

To determine the best choice, we can use the concept of present value. The present value of $1,500 in 5 years depends on the interest rate, because we could invest the $1,000 today and earn interest over the 5 years. At an interest rate of 8 percent, the present value of $1,500 in 5 years is approximately $981. So, the $1,000 today is the better choice. At a higher interest rate of 9 or 10 percent, the present value of $1,500 in 5 years would be even lower, making the $1,000 today the clear better choice. Therefore, the best choice is A) 8 percent.

Question 5

Suppose you will receive $500 at some point in the future.If the annual interest rate is 7.5 percent,then the present value of the $500 is
A) $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years.
B) $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years.
C) $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years.
D) $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.

Accepted Answer

The present value (PV) of receiving $500 in the future can be calculated using the formula PV = FV/(1+r)^n, where FV is the future value, r is the annual interest rate, and n is the number of years in the future.

For receiving $500 in 5 years:
PV = 500/(1+0.075)^5 = $348.28

For receiving $500 in 10 years:
PV = 500/(1+0.075)^10 = $242.60

Therefore, the best choice is B, as it matches the above calculations.

Question 6

Discounting refers directly to
A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) calculations that ignore the phenomenon of compounding for the sake of ease and simplicity.
D) decreases in interest rates over time,while compounding refers to increases in interest rates over time.

Accepted Answer

Discounting is the process of finding the present value of a future sum of money, taking into account the time value of money and assuming a certain rate of return or interest rate. It involves discounting the future cash flows back to their present value using a discount rate. This is different from finding the future value of a present sum of money, which involves calculating how much an asset or investment will be worth after a certain period of time, assuming a certain rate of return or interest rate.

Question 7

Imagine that someone offers you $100 today or $200 in 10 years.You would prefer to take the $100 today if the interest rate is
A) 4 percent.
B) 5 percent.
C) 6 percent.
D) None of the above are correct.

Accepted Answer

The answer of Imagine that someone offers you $100 today...

Question 8

If the interest rate is 7.5 percent,then what is the present value of $4,000 to be received in 6 years?
A) $2,420.68
B) $2,591.85
C) $2,996.33
D) $3,040.63

Accepted Answer

We can use the formula for present value of a single sum: PV = FV/(1+r)^n
PV = 4000/(1+0.075)^6
PV = 4000/1.575818...
PV = $2,591.85 (rounded to nearest cent)
Therefore, the best choice is B.

Question 9

Imagine that someone offers you $X today or $1,500 in 5 years.If the interest rate is 6 percent,then you would prefer to take the $X today if and only if
A) X > 1,055.56.
B) X > 1,120.89.
C) X > 1,213.33.
D) X > 1,338.26.

Accepted Answer

We can use the formula for present value of a future amount, which is:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. In this case, we want to find the minimum value of X that makes PV of X greater than $1,500 after 5 years at an interest rate of 6%. So we have:
PV of X = X / (1 + 0.06)^5
PV of $1,500 = $1,500
We want:
PV of X > PV of $1,500
So we have:
X / (1 + 0.06)^5 > $1,500
X > $1,500 x (1 + 0.06)^5
X > $1,500 x 1.33826
X > $2,007.38
The minimum value of X that satisfies this condition is $1,120.89, so the answer is B.

Question 10

Suppose you are deciding whether or not to buy a particular bond for $2,990.08.If you buy the bond and hold it for 5 years,then at that time you will receive a payment of $5,000.You will buy the bond today if the interest rate is
A) no less than 9.48 percent.
B) no greater than 9.48 percent.
C) no less than 10.83 percent.
D) no greater than 10.83 percent.

Accepted Answer

The answer of Suppose you are deciding whether or not...

Question 11

Suppose you are deciding whether to buy a particular bond.If you buy the bond and hold it for 4 years,then at that time you will receive a payment of $10,000.If the interest rate is 6 percent,you will buy the bond if its price today is no greater than
A) $8,225.06.
B) $7,920.94.
C) $7,672.58.
D) $6,998.98.

Accepted Answer

To calculate the maximum price you should pay for the bond, you need to discount the future payment of $10,000 by the interest rate of 6% per year for 4 years. Using the present value formula:

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

where n is the number of years.

Present value = $10,000 / (1 + 0.06)^4 
Present value = $7,920.94

Therefore, if the price of the bond today is $7,920.94 or less, it would be worth buying because you would expect to receive the payment of $10,000 in 4 years and earn a 6% return on your investment.

Question 12

A manufacturing company is thinking about building a new factory.The factory,if built,will yield the company $300 million in 7 years,and it would cost $220 million today to build.The company will decide to build the factory if the interest rate is
A) no less than 4.53 percent.
B) no greater than 4.53 percent.
C) no less than 5.81 percent.
D) no greater than 5.81 percent.

Accepted Answer

The company needs to calculate the net present value (NPV) of the project to determine if it is worthwhile. Using a discount rate of r, the NPV can be calculated as follows: NPV = -220 + 300/(1+r)^7 For the company to decide to build the factory, the NPV must be positive. Solving for r: NPV > 0 -220 + 300/(1+r)^7 > 0 300/(1+r)^7 > 220 1.36 < (1+r)^7 1.36^(1/7) < 1+r r > 0.0453 Therefore, the interest rate must be no greater than 4.53 percent for the project to have a positive NPV and for the company to decide to build the factory.

Question 13

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is
A) $414.09.
B) $434.00.
C) $441.87.
D) $481.24.

Accepted Answer

To calculate future value, we can use the formula FV = PV x (1 + r)^n,
where PV is the present value, r is the interest rate, and n is the number of years.

In this case, PV = $350, r = 0.06, and n = 4.
Plugging in these values, we get:
FV = $350 x (1 + 0.06)^4
FV = $350 x 1.262476
FV = $441.87

Therefore, the future value of the $350 after 4 years is $441.87, which corresponds to choice C.

Question 14

The field of finance primarily studies
A) how society manages its scarce resources.
B) the implications of time and risk for allocating resources over time.
C) firms' decisions concerning how much to produce and what price to charge.
D) how society can reduce market risk.

Accepted Answer

The field of finance primarily studies how to allocate resources over time, taking into consideration the implications of time and risk. It is focused on making decisions about investments, financial instruments, and management of assets and liabilities. While finance certainly has implications for firms' production and pricing decisions, that is not its primary focus. Similarly, while finance can help individuals and society reduce some forms of risk, it is not solely focused on reducing market risk. Finally, while finance certainly has implications for managing scarce resources, that is a broader focus area for economics as a whole.

Question 15

Imagine that someone offers you $100 today or $200 in 10 years.You would prefer to take the $100 today if the interest rate is
A) 4 percent.
B) 6 percent.
C) 8 percent.
D) All of the above are correct.

Accepted Answer

The answer of Imagine that someone offers you $100 today...

Question 16

Most financial decisions involve two related elements:
A) advice and consent.
B) investment and taxes.
C) time and risk.
D) saving and consumption.

Accepted Answer

Time and risk are two key elements that are commonly involved in most financial decisions. Time refers to how long it will take to achieve a particular financial goal, while risk refers to the uncertainty or variability of outcomes associated with a particular investment or decision. Understanding the interplay between these two elements can help individuals make more informed financial decisions.

Question 17

One way to characterize the difference between compounding and discounting is to say that
A) compounding involves the assumption that the interest rate is zero,whereas discounting does not involve that assumption.
B) discounting involves the assumption that the interest rate is zero,whereas compounding does not involve that assumption.
C) the process of compounding produces a future value,whereas the process of discounting produces a present value.
D) the process of compounding produces a present value,whereas the process of discounting produces a future value.

Accepted Answer

Compounding involves calculating the future value of a current investment, while discounting involves calculating the present value of a future cash flow. Therefore, compounding produces a future value, while discounting produces a present value. Neither process assumes a zero interest rate.

Question 18

Which of the following statements best describes the economist's view of finance and the financial system?
A) The financial system is very important to the functioning of the economy,and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.
B) The financial system,while interesting,is not very important to the functioning of the economy;however,the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.
C) The financial system is very important to the functioning of the economy;however,the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful.
D) The field of finance is intimately concerned with the financial system and the tools of finance,and financial economists see great importance in them;however,the "mainstream" economist sees little value in studying financial markets or the tools of finance.

Accepted Answer

The statement acknowledges the importance of the financial system to the functioning of the economy and recognizes the usefulness of financial tools for individuals. This aligns with the views of most economists who see the financial system as a crucial aspect of modern economies and study financial markets and instruments extensively.

Question 19

Compounding refers directly to
A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) changes in the interest rate over time on a bank account or a similar savings vehicle.
D) interest being earned on previously-earned interest.

Accepted Answer

Compounding refers to interest being earned not just on the principal amount invested but also on the interest earned from previous periods. This results in the growth of the investment over time. Therefore, option D is the correct choice.

Question 20

The financial system
A) involves bank accounts,mortgages,stock prices,and many other items.
B) involves decisions and actions undertaken by people at a point in time that affect their lives in the future.
C) coordinates the economy's saving and investment.
D) All of the above are correct.

Accepted Answer

The financial system involves bank accounts, mortgages, stock prices, and many other items. It also involves decisions and actions undertaken by people that affect their lives in the future. Additionally, the financial system coordinates the economy's saving and investment. Therefore, option D, "All of the above are correct," is the best choice.

Quiz 27: The Basic Tools of Finance

James offers you $1,000 today or $X in 7 years.If the interest rate is 4.5 percent,then you would prefer to take the $1,000 today if and only if

Suppose you put $500 into a bank account today.Interest is paid annually and the annual interest rate is 5.5 percent.The future value of the $500 is

In which of the following instances is the present value of the future payment the largest?

Janelle offers you $1,000 today or $1,500 in 5 years.You would prefer to take the $1,500 in 5 years if the interest rate is

Suppose you will receive $500 at some point in the future.If the annual interest rate is 7.5 percent,then the present value of the $500 is

Discounting refers directly to

Imagine that someone offers you $100 today or $200 in 10 years.You would prefer to take the $100 today if the interest rate is

If the interest rate is 7.5 percent,then what is the present value of $4,000 to be received in 6 years?

Imagine that someone offers you $X today or $1,500 in 5 years.If the interest rate is 6 percent,then you would prefer to take the $X today if and only if

Suppose you are deciding whether or not to buy a particular bond for $2,990.08.If you buy the bond and hold it for 5 years,then at that time you will receive a payment of $5,000.You will buy the bond today if the interest rate is

Suppose you are deciding whether to buy a particular bond.If you buy the bond and hold it for 4 years,then at that time you will receive a payment of $10,000.If the interest rate is 6 percent,you will buy the bond if its price today is no greater than

A manufacturing company is thinking about building a new factory.The factory,if built,will yield the company $300 million in 7 years,and it would cost $220 million today to build.The company will decide to build the factory if the interest rate is

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

The field of finance primarily studies

Imagine that someone offers you $100 today or $200 in 10 years.You would prefer to take the $100 today if the interest rate is

Most financial decisions involve two related elements:

One way to characterize the difference between compounding and discounting is to say that

Which of the following statements best describes the economist's view of finance and the financial system?

Compounding refers directly to

The financial system