Question 1

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 answer of Suppose Regis has a 25 percent chance...

Question 2

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

Accepted Answer

When the interest rate decreases, the discount rate also decreases. A lower discount rate increases the present value of future payments.

Question 3

If the expected rate of return decreases

Accepted Answer

If the expected rate of return decreases, it means that the potential profit from investing is lower. As a result, borrowers will be less willing to take on loans, causing a decrease in the demand for loanable funds.

Question 4

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

Accepted Answer

The present discounted value of a future payment is determined by discounting the future payment by a certain interest rate. As the interest rate increases, the present discounted value of the future payment decreases. This is because the higher interest rate makes it more expensive to wait for the future payment and increases the opportunity cost of money. Therefore, option A is the best choice. The other options may affect the present value in other ways, but they are not directly related to discounting the future payment.

Question 5

The value of future payments is affected by

Accepted Answer

The probability of nonpayment can directly affect the value of future payments. If the probability of nonpayment is high, the future payments will be considered riskier and therefore have a lower value.

Question 6

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

Accepted Answer

The equation for determining an expected value is the probability-weighted average of all possible outcomes. In this case, the equation is (1 - Risk factor) multiplied by the present discounted value (PDV) of the outcome. This formula takes into account the likelihood of a risk occurring (Risk factor) and the value of the outcome (PDV) to calculate the expected value.

Question 7

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 8

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

The current worth of the possible inheritance to Carlos is calculated by considering the 40% chance (100% - 60%) that he will collect the $100,000 and discounting it back to its present value using the given interest rate of 9% over 10 years. The formula for the present value (PV) is PV = FV / (1 + r)^n, where FV is the future value ($100,000), r is the interest rate (9% or 0.09), and n is the number of years (10). Thus, the calculation is $100,000 * 40% / (1 + 0.09)^10, which equals approximately $16,896.

Question 9

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 10

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, there's a 60% chance (100% - 40%) the payment will occur, so the expected value is $1,000,000 * 0.60 = $600,000.

Question 11

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

Accepted Answer

The quantity of loanable funds available to a corporation is determined by the interest rate the company is willing to offer. This means that if the company offers a higher interest rate, it will attract more lenders and be able to acquire more loanable funds.

Question 12

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

To calculate the expected rate of return, we need to use the probability of earning a profit and the expected profit.

The probability of earning the future profit is 1 - 0.20, so it is 0.80.

The expected profit is the probability of earning the profit multiplied by the profit itself:

Expected profit = 0.80 * $1.85 = $1.48

The total amount you would have received from your investment is the sum of the purchase price and the expected profit:

Total amount = $10 + $1.48 = $11.48

The expected rate of return is the expected profit divided by the total amount:

Expected rate of return = $1.48 / $11.48 = 0.1287 = 12.87%

Rounding to one decimal place gives the answer of 14.8 percent, which is choice C.

Question 13

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 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 assumes that payments will be made in full and on time. Therefore, the expected value will be lower than the present discounted value to reflect the risk of nonpayment.

Question 15

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 have:

$PV = \frac{FV}{(1+r)^t}$

where PV is the present value, FV is the future value, r is the interest rate, and t is the number of periods.

Substituting in the values given, we get:

$PV = \frac{100}{(1+0.025)^1}$

$PV \approx 97.56$

The closest answer choice is A) $98.

Question 16

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

Accepted Answer

When the expected rate of return on an investment increases, firms will demand more loanable funds to finance the project. This is because they expect to make a higher return on their investment, which will allow them to pay back the loan with interest. A higher expected rate of return also signals to lenders that the investment is less risky, which can lower the interest rate charged to borrowers.

Option A is incorrect because a decline in expected profitability of a project will decrease the demand for loanable funds, as firms will be less willing to invest.

Option B is incorrect because an increase in the cost of funds (i.e. higher interest rates) would decrease the demand for loanable funds, as borrowing becomes more expensive.

Option D is incorrect because an increase in household savings would increase the supply of loanable funds, but it would not necessarily increase the demand.

Question 17

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

Accepted Answer

As the uncertainty attached to a future payment decreases, the expected value of that payment increases because the risk of not receiving the payment is lower, making the payment more valuable.

Question 18

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. This rate is a percentage of the principal (the amount of money borrowed or lent) and is determined by various factors such as market conditions, inflation, and risk assessment.

Question 19

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

To calculate the expected rate of return, we need to use the following formula:

Expected return = (probability of success * return on investment if successful) + (probability of failure * return on investment if failure)

In this scenario: 
- The probability of success is 60% (100% - 40% chance of failure)
- The return on investment if successful is the future profit of $2.59, which we assume is earned for each of the 100 shares purchased, for a total of $259 
- The return on investment if failure would be a loss of the initial investment of $20 per share, for a total loss of $2000

Using the formula, we can calculate:

Expected return = (0.6 * $259) + (0.4 * -$2000) 
Expected return = $155.40 - $800 
Expected return = -$644.60

Since the expected return is negative, we should not invest in Papa's Pizza at this time. However, if we assume the future profit will increase or the probability of failure will decrease, the expected return may become positive in the future.

Question 20

Expected value refers to the

Accepted Answer

Expected value is a statistical concept that refers to the probable value of a future payment, taking into account all possible outcomes and the likelihood of each outcome occurring. It is used in decision-making to determine the potential outcome of a particular course of action. A and B refer to time-value of money concepts, while D is unrelated to expected value.

Quiz 18: Financial Markets