Question 1

Someone who has to make a choice involving whether to receive a certain amount of money now or in the future, will probably choose _______ , since there is a(n) ________ in waiting to use money.

Accepted Answer

The correct answer is B) now; opportunity cost because there is a cost associated with waiting to use money, known as the opportunity cost, which refers to the benefits or earnings one foregoes by not having access to the money immediately.

Question 2

An individual's wealth:

Accepted Answer

Wealth is the total value of an individual's assets minus any liabilities or debts. It is not limited to income or tax considerations, as both of those factors can fluctuate over time.

Question 3

The present value of a future payment increases if the:

Accepted Answer

The present value of a future payment increases when the interest rate decreases because the discount factor (which is based on the interest rate) used to calculate the present value is smaller, making the present value larger.

Question 4

Assets are:

Accepted Answer

Assets are anything of value that an individual or organization owns and has monetary value. They can be physical assets such as property, machinery or inventory, or financial assets such as stocks, bonds, or cash. Therefore, option B is the correct answer. Options A and C are incorrect as they describe liabilities and interest respectively. Option D is incorrect as it contradicts the definition of assets.

Question 5

An obligation to make future payments is:

Accepted Answer

An obligation to make future payments represents a liability, as it reflects a financial obligation to another party. This could include payments on loans, leases, or other contractual agreements.

Question 6

Payments that are distributed over time are linked to one another by:

Accepted Answer

Payments that are distributed over time are linked to one another through interest rates. The interest rate represents the cost of borrowing or the return on investment, and it is used to calculate the present value of future payments.

Question 7

An amount that would equal a particular future value if deposited today at a specific interest rate is the:

Accepted Answer

The amount that would equal a particular future value if deposited today is the present value. This is because the present value represents the current value of future cash flows, taking into account the time value of money and the interest rate that can be earned on the investment. The other options, inflation rate, discount premium, and market index, do not represent the concept of present value.

Question 8

The amount paid to postpone the use of wealth divided by the amount of wealth whose use is postponed is a(n):

Accepted Answer

The amount paid to postpone the use of wealth is interest, and it is divided by the amount of wealth whose use is postponed, which represents the principal. Therefore, the ratio of interest to principal is the interest rate.

Question 9

The dollar amount of a future payment is ________ its present value.

Accepted Answer

The dollar amount of a future payment is greater than its present value due to the time value of money, which suggests that a dollar today is worth more than a dollar in the future because of its potential earning capacity.

Question 10

The interest rate is:

Accepted Answer

The interest rate is defined as the payment made for postponing the use of wealth, expressed as a percentage of the amount of wealth whose use is postponed.

Question 11

Using slightly different notation from that used in the text, the present value (PV) of a payment one year in the future (FV), given interest rate (r), is given by the equation:

Accepted Answer

The present value (PV) of a future payment (FV) is calculated using the formula PV = FV / (1 + r), where r is the interest rate. This formula takes into account the time value of money, meaning that money is worth more in the present than in the future due to factors such as inflation and the potential for earning interest by investing the money. Therefore, the correct option is C.

Question 12

Anything that is of value is:

Accepted Answer

An asset is anything that has value and can be used to generate income or help meet financial obligations. A liability, on the other hand, refers to an obligation to pay for something that has been purchased, such as a loan or mortgage. Wealth is often defined as the value of all assets minus liabilities, so while it is related to the concept of value, it is not the best answer choice. Interest refers to the amount paid to borrow money, so it is not directly related to the concept of value.

Question 13

All other things unchanged, people who choose to have a certain amount of money now instead of at a future date:

Accepted Answer

Choosing to have a certain amount of money now instead of at a future date can have benefits if the individual needs the money in the intervening time period. Additionally, if prices go up unexpectedly during the time period, the individual can benefit by having the money now. Therefore, both options B and C are true. However, it is not necessarily a mistake to choose to have money now instead of at a future date, as there may be valid reasons for needing the money immediately. Therefore, option A is not necessarily true.

Question 14

Using slightly different notation than in the text, we could say that the present value (PV) of a payment n years in the future (FV), given interest rate (r), is given by the equation:

Accepted Answer

The present value (PV) is the amount of money today that is equivalent to a future payment (FV) after n years, given a certain interest rate (r). We use the formula PV = FV / (1 + r)^n to calculate the present value. Choice D is the correct formula that matches this definition. Choice A is incorrect because it doesn't include the interest rate. Choice B is incorrect because it uses the reciprocal of the future value. Choice C is incorrect because it doesn't take into account the number of years until the payment is received.

Question 15

If you are paid $10,500 in one year on a $10,000 loan made today, then your interest rate is:

Accepted Answer

To calculate the interest rate, we need to use the simple interest formula:

Interest = (Principal x Rate x Time)

Where:

Principal = $10,000 (the amount borrowed)
Interest = $10,500 - $10,000 = $500 (the amount paid back in one year)
Time = 1 year

Substituting these values:

$500 = ($10,000 x Rate x 1)
Rate = $500 / $10,000
Rate = 0.05 or 5%

Therefore, the interest rate is 5%.

Question 16

Liabilities are:

Accepted Answer

Liabilities are obligations to make future payments, such as debt or bills that will need to be paid. It is not the sum of all your assets (A), anything of value (B), or a payment made to people who postpone the use of their wealth (D).

Question 17

The _______ the payment made for waiting, the _______ the interest rate.

Accepted Answer

The interest rate is the payment made for waiting, so a greater payment implies a higher interest rate.

Question 18

The present value of a future payment is _______ its future dollar amount.

Accepted Answer

The present value of a future payment is less than its future dollar amount. This is because the present value takes into account the time value of money, which means that money available today is worth more than the same amount of money in the future due to the potential earning power of investment. Therefore, to calculate the present value of a future payment, a discount rate must be applied to adjust for this difference in value over time.

Question 19

The total of assets less liabilities is:

Accepted Answer

The total of assets less liabilities is commonly known as net worth or owner's equity, which is a measure of an individual's or organization's wealth.

Question 20

A payment made to people who agree to postpone their use of wealth is:

Accepted Answer

A payment made to people who agree to postpone their use of wealth is known as interest. Interest is paid by borrowers to lenders for the use of the borrowed money over a certain period of time. It is essentially compensation for the lender's decision to delay their consumption and investment of their wealth. Rent is a payment made for the use of a property or asset, profit is the surplus earned by businesses after deducting expenses from revenues, and a wage is a payment made to employees for their labor.

Quiz 13: Interest Rates and the Markets for Capital and Natural Resources

Someone who has to make a choice involving whether to receive a certain amount of money now or in the future, will probably choose _ , since there is a(n) __ in waiting to use money.