Question 1

The greater the risk of nonrepayment of a loan,other things being equal

Accepted Answer

The higher the risk of nonrepayment, the higher the rate of interest charged on the loan. This is because the lender needs to compensate for the potential loss of the principal amount and any interest that would have been earned if the loan was repaid on time. The other options are not logically related to the risk of nonrepayment.

Question 2

If the annual interest rate remains unchanged over the next two years,and the present value of $120 to be received one year from now is $100,what will $100 be worth two years from now?

Accepted Answer

If the present value of $120 to be received one year from now is $100, then the interest rate is 20%. Therefore, $100 will be worth $120 after one year and $144 after two years (assuming no compounding).

Question 3

The rate of interest that you pay on a home loan depends upon all of the following EXCEPT

Accepted Answer

The rate of interest on a home loan depends on the length of the loan, your credit rating, and any handling charges or loan fees. However, it does not depend on the supply of houses in the real estate market.

Question 4

The difference between the nominal rate of interest and the real rate of interest is

Accepted Answer

The nominal rate of interest is the rate which does not account for inflation, while the real rate of interest adjusts for inflation. Therefore, the difference between the nominal rate of interest and the real rate of interest is the anticipated rate of inflation.

Question 5

A firm is considering three projects.Each costs $1 million now.Project A will yield $400,000 a year for three years,beginning one year from now.Project B will yield $1.25 million three years from now,and Project C will yield $600,000 for two years,beginning two years from now.If the interest rate is 8 percent,which of these projects should the firm undertake?

Accepted Answer

The answer of A firm is considering three projects.Each costs...

Question 6

Assuming a market rate of interest equal to 7 percent,what is the present value of $200 to be received one year from today?

Accepted Answer

Using the formula for present value, PV = FV / (1 + r), where PV is the present value, FV is the future value, and r is the interest rate, we get PV = 200 / (1 + 0.07) = 187. This means that the present value of $200 to be received one year from today, assuming a market rate of interest equal to 7 percent, is $187. Therefore, the best choice is C.

Question 7

The greater the interest rate,

Accepted Answer

The answer of The greater the interest rate,
...

Question 8

What is the real (adjusted for inflation)present value of $104.25 that you could receive one year from now,given that the rate of interest is 4.25 percent and the anticipated rate of inflation is 1 percent?

Accepted Answer

The real present value of future money is calculated by adjusting the nominal amount for inflation and discounting it by the real interest rate. The real interest rate can be approximated by the formula $r = \frac{1 + nominal\ rate}{1 + inflation\ rate} - 1$. Here, $r = \frac{1 + 0.0425}{1 + 0.01} - 1 = 0.031683$. The present value is then calculated as $PV = \frac{FV}{(1 + r)}$, where $FV$ is the future value. So, $PV = \frac{104.25}{1.031683} \approx \$100.97$.

Question 9

The general form for discounting is

Accepted Answer

PV = $\mathrm { A } _ { \mathrm { t } }$ /$( 1 + \mathrm { i } ) ^ { \mathrm { t } }$ The general form for discounting is PV = $\mathrm { A } _ { \mathrm { t } }$ /$( 1 + \mathrm { i } ) ^ { \mathrm { t } }$ , where PV is the present value, $\mathrm { A } _ { \mathrm { t } }$ is the future value, i is the interest rate, and t is the number of periods.

Question 10

The real interest rate is the

Accepted Answer

The real interest rate is the nominal interest rate minus the anticipated inflation rate. This is because the nominal interest rate includes both the actual interest rate and inflation, and the real interest rate measures the true value of borrowing or lending money.

Question 11

Present value is

Accepted Answer

Present value is the value today of a future payment or series of payments. As the time horizon increases, the present value decreases because the future payment is worth less today due to the time value of money, which is the fact that money today is worth more than the same amount of money in the future due to its earning potential. Therefore, choice (B) is the best option. Choices (A) and (D) are incorrect because present value is directly related to the rate of interest and is a fundamental concept in the time value of money. Choice (C) is incorrect because present value is always expressed in today's dollars.

Question 12

The present value of $100 to be received one year from now

Accepted Answer

The present value of a future amount of money cannot be accurately determined without knowing the interest rate, as it is essential for discounting the future amount back to its present value.

Question 13

What is the present value of $104.25 that you could receive one year from now,given that the rate of interest is 4.25 percent?

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($104.25), r is the interest rate (4.25%), and n is the number of periods (1 year). Plugging in the values gives PV = $104.25 / (1 + 0.0425) = $100.

Question 14

The present value of a sum to be received in the future is greater

Accepted Answer

The present value of a future sum increases as the time period before receiving that sum decreases, because there is less time for the value to be discounted. Higher interest or discount rates actually decrease the present value, as they increase the rate at which future values are discounted back to the present. Inflation rate is not directly related to the calculation of present value in the context of this question.

Question 15

How much money would you have to put into a savings account today to be worth $500 three years from now at a market rate of interest equal to 8 percent?

Accepted Answer

The answer of How much money would you have to...

Question 16

If the bank advertises 6 percent annual interest rate on a one-year certificate of deposit and you anticipate the rate of inflation to rise to 3 percent during the year,then the real rate of interest on the certificate of deposit is

Accepted Answer

The real rate of interest can be approximated by subtracting the anticipated inflation rate from the nominal interest rate. Therefore, 6 percent (nominal rate) - 3 percent (inflation rate) = 3 percent (real rate of interest).

Question 17

A firm is considering an investment that will cost $2 million today and $2 million a year from now.It will generate revenues of $1 million a year for five years,beginning two years from now.If the interest rate is 10 percent,the firm should

Accepted Answer

To determine whether or not the investment is profitable, we need to calculate the present value of the net revenues (revenues minus investment spending), discounted at an interest rate of 10%.

PV of net revenues = [(1 million / 1.1^2) + (1 million / 1.1^3) + ... + (1 million / 1.1^6)] - 4 million 
PV of net revenues = 3.03 million - 4 million 
PV of net revenues = -0.97 million

Since the present value of the net revenues is negative, the investment should not be made, as the cost of the investment is greater than the value of the future cash flows it will generate. Option A is the correct answer.

Question 18

Assuming a market rate of interest equal to 7 percent and anticipated inflation is 2 percent,what is the real (adjusted for inflation)present value of $200 to be received one year from today?

Accepted Answer

The answer of Assuming a market rate of interest equal...

Question 19

A star basketball player signs a contract that newspaper reports say is worth $20 million.The player receives $5 million on signing,and $5 million a year for three years.The contract is worth

Accepted Answer

The present value of $5 million received one or more years from now is less than $5 million due to inflation and the opportunity cost of investing the money elsewhere. Therefore, the actual value of the contract is less than the reported $20 million.

Question 20

The higher the expected rate of inflation,

Accepted Answer

According to the Fisher effect, nominal interest rates will increase by the expected rate of inflation. Therefore, the higher the expected rate of inflation, the higher is the nominal rate of interest.

Quiz 8: Rents, profits, and the Financial Environment of Business