Question 1

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?
A) $972.00
B) $973.44
C) $974.19
D) None of the above is correct.

Accepted Answer

First, we need to calculate the interest earned after two years: 
Interest = Principal x Rate x Time = $900 x 0.04 x 2 = $72. 
Then, we add the interest earned to the initial deposit: 
Final amount = $900 + $72 = $972. 
The closest option is B, which is $973.44. However, this seems to be a rounding error, as the exact answer should be $972.

Question 2

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?
A) $4
B) $8
C) $16
D) $32

Accepted Answer

According to the rule of 70, we divide 70 by the interest rate (2%) to find the approximate number of years it takes for the money to double. In this case, it would take approximately 35 years for the money to double. Therefore, after 140 years, the money would have doubled 4 times (since 140 divided by 35 equals 4). So the original $1 would have turned into $16 (1 doubled 4 times). Therefore, the best choice is C, $16.

Question 3

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years? A) $2,000(1.06) B) $1,000 + $(1.06)² C) $1,000(1.06)² D) None of the above are correct.

Accepted Answer

The formula for calculating compound interest is A=P(1+r)^n, where A is the final amount, P is the principal (initial amount), r is the interest rate expressed as a decimal, and n is the number of compounding periods. Plugging in the given values, we get A = $1,000(1+0.06)^2 = $1,123.60. Therefore, choice C is the correct answer. Choice A is incorrect because it does not take into account the compounding of interest. Choice B is incorrect because the formula does not make sense mathematically. Choice D is incorrect because one of the other choices is correct.

Question 4

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?
A) $400
B) $800
C) $1,600
D) $3,200

Accepted Answer

The answer of Using the rule of 70, about how...

Question 5

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?
A) $3,680.00
B) $3,712.77
C) $3,750.00
D) $3,772.57

Accepted Answer

The answer of You deposit X dollars into a 3-year...

Question 6

Which of the following has the highest future value?
A) $100 saved for 2 years at 10 percent interest
B) $110 saved for 2 years at 9 percent interest
C) $120 saved for 2 years at 8 percent interest
D) $130 saved for 2 years at 7 percent interest

Accepted Answer

The answer of Which of the following has the highest...

Question 7

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?
A) 3.5
B) 7
C) 14
D) None of the above is correct.

Accepted Answer

The rule of 70 states that to find the approximate number of years for an investment to double, divide 70 by the interest rate. Therefore, if the savings doubled in 10 years, we can divide 70 by 10 to find the interest rate, which is 7.

Question 8

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?
A) $2205
B) $2200
C) $1818.18
D) $1814.06

Accepted Answer

The answer of What is the present value of a...

Question 9

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years? A) $500(1.05)²+ $500/(1.05)² B) $500(1.05)²+ $500 C) $500 + $500/(1.05)² D) $500 + $500

Accepted Answer

To find the present value of the payments, we need to discount them to their present value using the given interest rate of 5 percent.

The first payment of $500 today has a present value of $500.

The second payment of $500 in two years has a present value equal to:

$500/(1.05)^2 = $453.51

Therefore, the total present value of the payments is:

$500 + $453.51 = $953.51

So, the correct answer is C.

Question 10

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?
A) The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B.
B) The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B.
C) The interest rates on the two loans are the same.
D) There is not enough information to determine which loan has the higher interest rate.

Accepted Answer

We can calculate the interest rates on both loans using the formula:

Interest Rate = (Total Repayment - Loan Amount) / Loan Amount x 100%

For Bank A:

Interest Rate = ($1,060 - $1,000) / $1,000 x 100% = 6%

For Bank B:

Interest Rate = ($1,600 - $1,500) / $1,500 x 100% = 6.67%

Therefore, the interest rate on the loan from Bank A is lower (6%) than the interest rate on the loan from Bank B (6.67%). So, the correct statement is that the interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B.

Question 11

The future value of $500 saved for two years at an interest rate of 5% is
A) $550.25.
B) $550.00.
C) $551.25.
D) None of the above are correct.

Accepted Answer

The formula for future value with compound interest is:
FV = PV x (1 + r/n)^(n*t)
where PV is the present value (in this case $500), r is the annual interest rate (5%), n is the number of times the interest is compounded per year (assuming once per year, so n = 1), and t is the time period (2 years).

Plugging in the values, we get:
FV = $500 x (1 + 0.05/1)^(1*2) = $500 x 1.1025 = $551.25

Therefore, the best choice is C, which matches this result.

Question 12

Will is risk averse and has $1,000 with which to make a financial investment. He has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Will should choose
A) option A.
B) option B.
C) option C.
D) either option A or option B because Will is indifferent between those two options and they are superior to option C.

Accepted Answer

Will is risk averse, which means he prefers a certain outcome with lower returns to an uncertain outcome with higher returns. Option A, the risk-free government bond, offers a certain outcome of earning 5 percent interest each year for two years, resulting in a total return of $1050. Option B, the low-risk stock, has an uncertain outcome but is expected to be worth about $1102.50 in two years, resulting in a total return of about 10.25 percent. Option C, the high-risk stock, has the highest uncertain outcome but is not a good choice for Will as he is risk averse and does not want to take that level of risk. Therefore, option A is the best choice for Will.

Question 13

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?
A) 4
B) 5
C) 6
D) 7

Accepted Answer

The answer of You deposit $3,000 into an N-year certificate...

Question 14

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?
A) an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account
B) an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account
C) an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account
D) an interest rate of 4.5 percent, with no processing fee and no bonus

Accepted Answer

The answer of On the Internet you find the following...

Question 15

What is the present value of a payment of $1,000 two years from now if the interest rate is 6%? A) $2,000/1.06 B) $1000/(1.06)² C) $1000/(1 + 0.06²) D) None of the above are correct.

Accepted Answer

The answer of What is the present value of a...

Question 16

Albert Einstein once referred to compounding as
A) "an obsession among economists that defies explanation."
B) "the greatest mathematical discovery of all time."
C) his own discovery.
D) John Maynard Keynes's greatest contribution.

Accepted Answer

Albert Einstein referred to compounding as "the greatest mathematical discovery of all time."

Question 17

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"
A) Abraham Lincoln
B) Thomas Edison
C) Benjamin Franklin
D) Albert Einstein

Accepted Answer

Albert Einstein referred to compounding as "the greatest mathematical discovery of all time."

Question 18

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?
A) an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account
B) an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account
C) an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account
D) an interest rate of 4.5 percent, with no processing fee and no bonus

Accepted Answer

The answer of On the Internet you find the following...

Question 19

In answering which of the following questions would you find it necessary to calculate a present value?
A) Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest?
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years?
C) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years?
D) You would find it necessary to calculate a present value in order to answer all of these questions.

Accepted Answer

The answer of In answering which of the following questions...

Question 20

In answering which of the following questions would you find it necessary to calculate a future value?
A) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years?
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years?
C) As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years?
D) You would find it necessary to calculate a future value in order to answer all of these questions.

Accepted Answer

In order to determine how much Jill will have in the bank account after 2 years, it is necessary to calculate the future value of her initial deposit plus interest earned.

Quiz 27: The Basic Tools of Finance

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Which of the following has the highest future value?

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

The future value of $500 saved for two years at an interest rate of 5% is

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?

Albert Einstein once referred to compounding as

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

In answering which of the following questions would you find it necessary to calculate a present value?

In answering which of the following questions would you find it necessary to calculate a future value?