Question 1

The thing you must give up in the future to consume something today is known as the _____of consuming now.
A) opportunity cost
B) variable cost
C) average cost
D) sunk cost

Accepted Answer

The opportunity cost is what you give up as a result of choosing to do something else. In this context, it refers to the future benefits you forego by choosing to consume something today instead of saving or investing those resources for future use.

Question 2

The growth process that causes investments to appreciate in value over many years is referred to as_____.
A) sniping
B) hedging
C) revaluating
D) compounding

Accepted Answer

Compounding refers to the process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes. This effect causes investments to grow at an accelerating rate, rather than linearly.

Question 3

An investor's principal is _____.
A) the value of her initial investment
B) the final balance she has in her account after a period of time
C) the amount she earns on her investment
D) the tax she pays on her interest income

Accepted Answer

The principal refers to the initial amount of money invested or loaned, before any earnings or interest are calculated.

Question 4

John had $2,000 in his account at the beginning of 2009. At the end of the year, the account had $2,002. The rate of return on the account is _____.
A) 0.02%
B) 0.1%
C) 2%
D) 10%

Accepted Answer

The answer of John had $2,000 in his account at...

Question 5

If Mary had $500 in her bank account at the beginning of 2010, she would have a final balance of _____after a year if the rate of return is 5%.
A) $505
B) $525
C) $550
D) $555

Accepted Answer

The correct calculation for a 5% increase on $500 is $500 * 1.05 = $525.

Question 6

Philip invested $800 for a period of one year at a rate of interest of 6%, the return on his investment is _____.
A) $48
B) $80
C) $60
D) $88

Accepted Answer

The return on investment can be calculated using the formula: Interest = Principal × Rate × Time. Here, Principal = $800, Rate = 6% (or 0.06), and Time = 1 year. So, Interest = $800 × 0.06 × 1 = $48.

Question 7

Ron had $100 in his bank account in 2008. He will have a final balance of _____after 3 years if the rate of return is 1%.
A) $101.01
B) $103.03
C) $130
D) $300

Accepted Answer

The balance after 3 years with a 1% annual interest rate is calculated using the formula for compound interest: $100 * (1 + 0.01)^3 = $103.03.

Question 8

The time delay between the initial investment and the final withdrawal is referred to as the _____.
A) effectiveness lag
B) problem of time inconsistency
C) holding period
D) implementation lag

Accepted Answer

The time delay between the initial investment and the final withdrawal is referred to as the holding period. This term is commonly used in finance to describe the duration for which an investment is held by an investor.

Question 9

Mr. Brown had deposited a sum of money in a bank at an interest of 5%. If he got back $4,725 after 1 year, what was his principal?
A) $945
B) $1,000
C) $4,500
D) $4,700

Accepted Answer

The interest earned in one year at 5% is part of the total amount Mr. Brown got back, which was $4,725. To find the principal, we subtract the interest from the total amount. The interest can be calculated as 5% of the principal. Let's denote the principal as P. The equation to represent the situation is P + 0.05P = $4,725. Simplifying, we get 1.05P = $4,725, and solving for P gives P = $4,725 / 1.05 = $4,500.

Question 10

Mark invested an amount of $1,500 for a period of 2 years at a rate of interest of 5%. In order to have a final balance of $1,653.75, Mark should_____.
A) consume the interest earned at the end of each year
B) reinvest the interest earned at the end of the first year
C) withdraw his principal at the end of the first year
D) invest $100 at the end of the first year

Accepted Answer

To achieve a final balance of $1,653.75 from an initial investment of $1,500 over 2 years at a 5% interest rate, Mark needs to reinvest the interest earned at the end of the first year. This is because compound interest (interest on interest) is required to reach the target amount. Simple interest alone would not suffice to reach $1,653.75 in 2 years.

Question 11

Which of the following reduces the buying power of the final balance in an investor's account?
A) A rise in the aggregate price level
B) A rise in domestic interest rates
C) An appreciation of the domestic currency
D) A decrease in money supply

Accepted Answer

A rise in the aggregate price level, or inflation, reduces the buying power of money, meaning the final balance in an investor's account can buy less than before.

Question 12

Which of the following is likely to be true if the inflation rate is positive in an economy?
A) The purchasing power of the returns from investments are likely to decline.
B) The purchasing power of the returns from investments are likely to increase.
C) The nominal interest rates are likely to decline.
D) The real money supply is likely to increase.

Accepted Answer

When inflation is positive, the value of currency decreases, meaning the purchasing power of any returns from investments is likely to decline as well.

Question 13

The real rate of return on an investment is obtained by_____.
A) subtracting the long-run inflation rate from the nominal rate of return
B) adding the long-run inflation rate to the nominal rate of return
C) multiplying the long-run inflation rate with the nominal rate of return
D) dividing the nominal rate of return by the long-run inflation rate

Accepted Answer

The real rate of return is calculated by subtracting the inflation rate from the nominal rate of return to adjust for the effect of inflation on purchasing power.

Question 14

If the nominal rate of return on an investment is 7.5% and the real rate of return is 5.2%, the long-run average inflation rate is _____.
A) 1.44%
B) 2.3%
C) 12.7%
D) 21.5%

Accepted Answer

The relationship between nominal return, real return, and inflation can be described by the Fisher equation, which is approximately: nominal return = real return + inflation rate. Therefore, the inflation rate is approximately 7.5% - 5.2% = 2.3%.

Question 15

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment.
-Refer to the scenario above. Mr. X will have a final balance of ____at the end of two years.
A) $5,300
B) $5,618
C) $10,600
D) $18,024

Accepted Answer

The final balance can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount ($5,000), r is the annual interest rate (6%, or 0.06), n is the number of times that interest is compounded per year, and t is the time the money is invested for in years. Assuming the interest is compounded annually (n=1), the formula simplifies to A = 5000(1 + 0.06)^2 = $5,618.

Question 16

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment.
-Refer to the scenario above. If the long-run inflation rate in the economy is 3.4%, the real rate of return on his investment will be____.
A) 1.77%
B) 2.6%
C) 9.4%
D) 20.4%

Accepted Answer

The real rate of return can be calculated using the Fisher equation, which is approximately given by the nominal rate of return minus the inflation rate. Therefore, 6% - 3.4% = 2.6%.

Question 17

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment.
-Refer to the scenario above. If the long-run average inflation rate is 3%, the real value of his investment in today's dollars is ____.
A) $5,304.50
B) $5,618.00
C) $10,430.50
D) $15,612.00

Accepted Answer

The real value of the investment can be calculated using the formula for the real rate of return, which adjusts the nominal rate for inflation. The nominal rate is 6%, and the inflation rate is 3%. The real rate of return can be calculated as $ \frac{1 + nominal\ rate}{1 + inflation\ rate} - 1 $. Substituting the given rates: $ \frac{1 + 0.06}{1 + 0.03} - 1 = \frac{1.06}{1.03} - 1 \approx 0.029126 $ or 2.91%. Applying this real rate over 2 years to the initial investment of $5,000 gives the future value as $ $5,000 \times (1 + 0.029126)^2 \approx $5,304.50 $.

Question 18

Bonds, stocks, and other financial claims that can be traded among investors are called _____.
A) units of account
B) principal
C) equity
D) securities

Accepted Answer

Securities are financial instruments that can be bought and sold on financial markets. These include stocks (equity securities) and bonds (debt securities), among others.

Question 19

_____ are long-term loans made to a borrower by a lender.
A) Bonds
B) Patents
C) Trademarks
D) Coupons

Accepted Answer

Bonds are financial instruments that represent a loan made by an investor to a borrower (typically corporate or governmental). They are a way to raise funds for long-term investments.

Question 20

If the market interest rate rises,_____.
A) the value of a previously issued bond falls
B) the value of a previously issued bond increases
C) the market price for bonds increases
D) the demand for bonds decreases

Accepted Answer

When market interest rates rise, the fixed interest payments of existing bonds become less attractive, causing their market value to fall.

Quiz 15: Web: Financial Decision Making

The thing you must give up in the future to consume something today is known as the _____of consuming now.

The growth process that causes investments to appreciate in value over many years is referred to as_____.

An investor's principal is _____.

John had $2,000 in his account at the beginning of 2009. At the end of the year, the account had $2,002. The rate of return on the account is _____.

If Mary had $500 in her bank account at the beginning of 2010, she would have a final balance of _____after a year if the rate of return is 5%.

Philip invested $800 for a period of one year at a rate of interest of 6%, the return on his investment is _____.

Ron had $100 in his bank account in 2008. He will have a final balance of _____after 3 years if the rate of return is 1%.

The time delay between the initial investment and the final withdrawal is referred to as the _____.

Mr. Brown had deposited a sum of money in a bank at an interest of 5%. If he got back $4,725 after 1 year, what was his principal?

Mark invested an amount of $1,500 for a period of 2 years at a rate of interest of 5%. In order to have a final balance of $1,653.75, Mark should_____.

Which of the following reduces the buying power of the final balance in an investor's account?

Which of the following is likely to be true if the inflation rate is positive in an economy?

The real rate of return on an investment is obtained by_____.

If the nominal rate of return on an investment is 7.5% and the real rate of return is 5.2%, the long-run average inflation rate is _____.

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment. -Refer to the scenario above. Mr. X will have a final balance of ____at the end of two years.

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment. -Refer to the scenario above. If the long-run inflation rate in the economy is 3.4%, the real rate of return on his investment will be____.

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment. -Refer to the scenario above. If the long-run average inflation rate is 3%, the real value of his investment in today's dollars is ____.

Bonds, stocks, and other financial claims that can be traded among investors are called _____.

_____ are long-term loans made to a borrower by a lender.

If the market interest rate rises,_____.