Question 1

The present discounted value of $60,000 to be received at the end of three years when the interest rate is 10 percent is closest to

Accepted Answer

The answer of The present discounted value of $60,000 to...

Question 2

The present discounted value of $100 to be received one year from now, if the interest rate is 2.5 percent, is closest to

Accepted Answer

Using the formula for present value, we get:

PV = FV / (1 + r)^n

where PV is present value, FV is future value, r is the interest rate, and n is the number of years. Plugging in the given values, we get:

PV = 100 / (1 + 0.025)^1

PV = 100 / 1.025

PV = 97.56

Rounding to the nearest dollar, the answer is $98, which is closest to choice A.

Question 3

In the loanable funds market,

Accepted Answer

The price in the loanable funds market is indeed the interest rate, which is the cost of borrowing money.

Question 4

Suppose you purchase shares in Papa's Pizza for $20 per share.The company believes there is a 40 percent chance it will fail to earn a discounted future profit of $2.59.What is the expected rate of return on your investment?

Accepted Answer

Expected return = (Probability of success x Potential return) + (Probability of failure x Potential loss)
Potential return = discounted future profit/cost per share
= $2.59/$20
= 0.1295 or 12.95%

Probability of success = 1 - Probability of failure
= 1 - 0.4
= 0.6 or 60%

Probability of failure = 0.4 or 40%

Expected return = (0.6 x 12.95%) + (0.4 x -100%)
= 7.77% - 40%
= 7.77% - 0.4 x 20
= 7.77% - 8%
= -0.23%
Since the expected return is negative, the best choice is not to invest in Papa's Pizza at $20 per share.

Question 5

The quantity of loanable funds available to a corporation depends on the

Accepted Answer

The quantity of loanable funds available to a corporation depends on the interest rate the company is willing to offer. This is because potential lenders will be more willing to lend money if they are offered a higher interest rate. Other factors such as company performance, stock price, and dividend payments may also impact the availability of loanable funds, but the interest rate is the most important factor.

Question 6

Suppose you purchase shares in Acme Gadget Company for $10 per share.The company believes there is a 20 percent chance it will fail to earn a discounted future profit of $1.85.What is the expected rate of return on your investment?

Accepted Answer

The expected rate of return can be calculated by considering the probability of success and failure. If the company succeeds (80% chance), the return is $1.85 on a $10 investment, which is an 18.5% return. If it fails (20% chance), the return is $0, or a 0% return. The expected rate of return is thus 0.8 * 18.5% + 0.2 * 0% = 14.8%.

Question 7

Suppose Carlos has a 60 percent chance of not collecting $100,000 when his rich uncle dies in 10 years.Juanita wants to buy the rights to this possible inheritance from Carlos.How much is the possible inheritance currently worth to Carlos? Assume the interest rate is 9 percent.

Accepted Answer

To calculate the present value of the possible inheritance, we can use the formula:

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 years.

In this case, the future value is $100,000, the interest rate is 9%, and the number of years is 10.

The probability of Carlos not collecting is 60%. So, the probability of him collecting is 40%. We can therefore adjust the future value by multiplying it by the probability:

Adjusted FV = $100,000 x 0.4 = $40,000

Now we can plug in the values into the formula:

PV = $40,000 / (1 + 0.09)^10 
PV = $16,895.61

Therefore, the possible inheritance is currently worth $16,895.61 to Carlos. The closest answer choice is C ($16,896).

Question 8

If the expected rate of return decreases

Accepted Answer

If the expected rate of return decreases, borrowers will be willing to borrow less money because they will have less incentive to invest in projects with lower expected returns. As a result, the demand for loanable funds will decrease.

Question 9

Suppose Regis has a 25 percent chance of not collecting $1,000 in one year.If the interest rate is 10 percent, what is the expected value of the future payment?

Accepted Answer

The expected value is calculated by multiplying the probability of each outcome by its value and summing the results. The expected payment is 75% of $1,000, which is $750. Discounting this at 10% gives $750 / 1.10 = $682.

Question 10

The intersection of the demand for loanable funds and the supply of loanable funds determines the

Accepted Answer

The answer of The intersection of the demand for loanable...

Question 11

Which of the following is the equation for determining an expected value?

Accepted Answer

The equation for determining an expected value is (1 - Risk factor) × PDV. This calculates the expected value by multiplying the present discounted value (PDV) by the risk factor, which is then subtracted from 1. This gives the probability-weighted value of the potential outcome, taking into consideration the probability of the outcome occurring and the time value of money.

Question 12

Which of the following will cause the demand for loanable funds to increase?

Accepted Answer

If the expected rate of return increases, then more businesses or individuals will want to borrow money to invest in projects with higher returns, leading to an increase in the demand for loanable funds. A decrease in expected profitability (choice A) would have the opposite effect and decrease the demand for loanable funds. An increase in the cost of funds (choice B) would increase the cost of borrowing and decrease the demand for loanable funds. An increase in household savings (choice D) would increase the supply of loanable funds, but would not directly affect the demand for loanable funds.

Question 13

The present discounted value of a future payment will increase when the

Accepted Answer

The present discounted value of a future payment is inversely related to the interest rate. As the interest rate decreases, the present value of the future payment increases.

Question 14

The expected value of a future payment differs from the present discounted value in that the expected value

Accepted Answer

The expected value takes into account the possibility of nonpayment, while the present discounted value does not.

Question 15

Expected value refers to the

Accepted Answer

Expected value is the probable value of a future payment or outcome, based on the probabilities of all possible outcomes. It is used in decision making to determine the average outcome or expected return. Options A and B refer to time value of money concepts, and D is unrelated to expected value.

Question 16

The value of future payments is affected by

Accepted Answer

The probability of nonpayment affects the value of future payments because if there is a high risk that the issuer will not be able to make the payments, then the future payments are worth less to investors. The other choices, including the level of dividends, capital gains, and par value, may affect the current price of a security, but they do not directly impact the value of future payments.

Question 17

If the present discounted value of a payment is $1,000,000 and there is a 40 percent chance that the payment will not occur, then the expected value is

Accepted Answer

The expected value is calculated by multiplying the value of the payment by the probability it will occur. Here, with a 60% chance (100% - 40%) that the payment of $1,000,000 will occur, the expected value is $1,000,000 * 0.60 = $600,000.

Question 18

As the uncertainty attached to a future payment _______, the expected value _______.

Accepted Answer

When the uncertainty attached to a future payment decreases, it means the payment is becoming more certain. As a result, the expected value of that payment increases because there is a higher likelihood of receiving it.

Question 19

The price paid for the use of money is defined as the

Accepted Answer

The price paid for the use of money is commonly known as the interest rate, which is the amount charged by the lender to the borrower for providing funds to be used for a certain period of time.

Question 20

The present discounted value of a future payment will decrease when the

Accepted Answer

According to the time value of money principle, the present discounted value of a future payment is inversely related to the interest rate. As the interest rate increases, the discounted value of future payment decreases. Therefore, choice A is the correct answer.

Quiz 18: Financial Markets