Question 1

The price of an antique is expected to rise by 8% during the next year.The interest rate is 12%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 800 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique?
A) 6,666.67 dollars
B) 20,000 dollars
C) 800 dollars
D) 16,800 dollars
E) 8,000 dollars

Accepted Answer

The answer of The price of an antique is expected...

Question 2

If the interest rate is 17%,and will remain 17% forever,how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now,1,368 dollars 2 years from now,and nothing at any other time?
A) 7,000 dollars
B) 6,000 dollars
C) 41,176.47 dollars
D) 126,000 dollars
E) 8,000 dollars

Accepted Answer

To find the present value of the future cash flows, we discount each payment back to the present value using 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 periods. For the payment of 7,020 dollars 1 year from now: PV = 7,020 / (1 + 0.17)^1 = 7,020 / 1.17 ≈ 6,000 dollars. For the payment of 1,368 dollars 2 years from now: PV = 1,368 / (1 + 0.17)^2 = 1,368 / 1.3689 ≈ 1,000 dollars. Adding these together gives a total present value of approximately 7,000 dollars.

Question 3

The interest rate is 10% and will remain so forever.You do not drink wine but are interested in buying some for investment purposes.Assume that there are no transactions costs or storage costs and that a certain bottle of wine will be worth $44 one year from now,$51 two years from now,and $55 three years from now.After that it turns to worthless vinegar.How much should you be willing to pay for a bottle? (Pick the closest answer. )
A) $40
B) $42.15
C) $47.15
D) $41.32
E) $49.30

Accepted Answer

To calculate the present value of the wine bottle, we need to discount the future cash flows back to the present at the given interest rate of 10%. Using the formula for the present value of an annuity, we get:

PV = (44/(1+0.1)^1) + (51/(1+0.1)^2) + (55/(1+0.1)^3)
   = 40 + 42.15 + 40.84
   = $123.99

Therefore, the maximum amount we should be willing to pay for the bottle today is $123.99. Since the closest answer is B) $42.15, that is the best choice.

Question 4

The price of an antique is expected to rise by 4% during the next year.The interest rate is 6%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 400 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique?
A) 6,666.67 dollars
B) 8,400 dollars
C) 400 dollars
D) 20,000 dollars
E) 4,000 dollars

Accepted Answer

The answer of The price of an antique is expected...

Question 5

The interest rate is 10% and will remain so forever.You do not drink wine but are interested in buying some for investment purposes.Assume that there are no transactions costs or storage costs and that a certain bottle of wine will be worth $55 one year from now,$58 two years from now,and $64 three years from now.After that it turns to worthless vinegar.How much should you be willing to pay for a bottle? (Pick the closest answer. )
A) $47.93
B) $53.12
C) $48.08
D) $50
E) $57.08

Accepted Answer

The answer of The interest rate is 10% and will...

Question 6

Ashley,from your workbook,has discovered another wine,wine D.Wine drinkers are willing to pay 45 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer. )
A) 76 dollars
B) 45 dollars
C) 150 dollars
D) 495 dollars
E) 71 dollars

Accepted Answer

The answer of Ashley,from your workbook,has discovered another wine,wine D.Wine...

Question 7

The sum of the terms of the infinite geometric series 1,0.86,0.86²,0.86³,... ,is closest to which of the following numbers? A) B0 B) 1.86 C) 7.14 D) 0.54 E) 116.28

Accepted Answer

The common ratio is 0.86, and the first term is 1, so the sum can be calculated using the formula $S = \frac{a_1}{1-r}$, where $a_1$ is the first term and $r$ is the common ratio.

Plugging in, we get:

$S = \frac{1}{1-0.86} = \frac{1}{0.14} = \frac{100}{14} = \frac{50}{7} \approx 7.14$

Therefore, the sum is closest to $\boxed{	extbf{(C) }7.14}$.

Question 8

Suppose that a dispute in the Persian Gulf halts the sale of oil from the Persian Gulf for one year.At the same time an important new oil field is found in a place where nobody expected there to be oil.What does economic theory predict will be the effect on the future price of oil to be delivered two years from now?
A) It will fall if the new pool is larger than the stock of oil in the Persian Gulf and rise otherwise.
B) It will fall.
C) It will rise unless the new pool can be brought into production before the Persian Gulf supply is resumed.
D) It will rise.
E) It will rise if the cost of extraction for the new oil is greater than the cost of extraction in the Gulf and fall otherwise.

Accepted Answer

Economic theory predicts that if there is a decrease in supply of a good, such as oil from the Persian Gulf, and no change in demand, then the price of the good will increase. However, if a new oil field is found, it increases supply and pushes the price down. Therefore, the price of oil two years from now will fall.

Question 9

If the rate of inflation is greater than the interest rate,
A) you should consume all of your wealth in the first period.
B) you are better off keeping your money in a mattress at home (assuming no risk of it being stolen)than at a bank.
C) you will necessarily consume less this period than you would if the rate of inflation were less than the interest rate.
D) you will necessarily consume more this period than you would if the rate of inflation were less than the interest rate.
E) None of the above.

Accepted Answer

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Question 10

Bank 1 offers a deal on deposits of $1,000 or more.You must leave your money in the bank for three years,but bank 1 will pay you 8% interest for the first year,8% interest for the second year,and 7% interest for the third year.In response,bank 2 offers a deal that it claims is even better.It also requires you to deposit at least $1,000 and to leave it in the bank for three years,but it will pay 12% interest in the first year and then 8% in the second and third year.After three years,you can take your money out of either bank and do what you want with it.Both banks compound interest annually.
A) The offer of bank 2 becomes relatively more attractive as the size of your initial deposit is larger.
B) Bank 2 offers a better deal than bank 1.
C) Bank 1 offers a better deal than bank 2.
D) The two offers are equally valuable.
E) None of the above.

Accepted Answer

The answer of Bank 1 offers a deal on deposits...

Question 11

The sum of the terms of the infinite geometric series 1,0.85,0.85²,0.85³,... ,is closest to which of the following numbers? A) 0.54 B) 1.85 C) B0 D) 6.67 E) 117.65

Accepted Answer

The answer of The sum of the terms of the...

Question 12

Ashley,from your workbook,has discovered another wine,wine D.Wine drinkers are willing to pay 40 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 20 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer. )
A) 93 dollars
B) 40 dollars
C) 200 dollars
D) 440 dollars
E) 71 dollars

Accepted Answer

The answer of Ashley,from your workbook,has discovered another wine,wine D.Wine...

Question 13

A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $4,000 zero coupon bond will come due on January 1,2020.If the interest rate is 5% and will remain 5% forever,what will this bond be worth on January 1,2005? A) $4,000/0.05 B) $4,000/0.05¹⁵ C) $4,000 + 4,000/15 D) $4,000+ 1.05¹⁵ E) None of the above.

Accepted Answer

The present value of the bond in 2005 can be calculated using the formula: 
Present Value = Face Value / (1+interest rate)^number of years 
Here, face value = $4,000, interest rate = 5%, and number of years = 15 (from 2005 to 2020). 
So, Present value = $4,000 / (1+0.05)^15 = $1,951.81 
Therefore, the correct option is D, which is the closest to this value, after adjusting for rounding.

Question 14

A large (subterranean)pool of oil lies in a remote region of Ohio.Oil companies have explored this region and know how much oil there is.They have purchased the rights to drill and extract oil when they wish to do so.Because of the extremely forbidding geography and the savagery of the natives,the companies have decided to postpone extraction until the price of oil is higher.The theory of intertemporal arbitrage predicts that
A) the companies are behaving irrationally.
B) the price of rights to this oil must rise at the interest rate.
C) the oil companies will not drill unless production costs fall.
D) the price of rights to this oil will stay constant until it pays to extract.
E) None of the above.

Accepted Answer

The theory of intertemporal arbitrage predicts that the price of the rights to this oil must rise at the interest rate, reflecting the opportunity cost of not extracting the oil now and the expected future profits from extraction.

Question 15

Bank 1 offers a deal on deposits of $1,000 or more.You must leave your money in the bank for three years,but bank 1 will pay you 4% interest for the first year,4% interest for the second year,and 7% interest for the third year.In response,bank 2 offers a deal that it claims is even better.It also requires you to deposit at least $1,000 and to leave it in the bank for three years,but it will pay 7% interest in the first year and then 4% in the second and third years.After three years,you can take your money out of either bank and do what you want with it.Both banks compound interest annually.
A) Bank 2 offers a better deal than bank 1.
B) Bank 1 offers a better deal than bank 2.
C) The two offers are equally valuable.
D) The offer of bank 2 becomes relatively more attractive as the size of your initial deposit is larger.
E) None of the above.

Accepted Answer

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Question 16

A bond has a face value of 5,000 dollars.It will pay 500 dollars in interest at the end of every year for the next 45 years.At the time of the last interest payment,45 years from now,the company that issued the bond will redeem the bond at face value.That is,the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%,how much would a rational investor pay for this bond right now?
A) 5,000 dollars
B) 27,500 dollars
C) 22,500 dollars
D) More than any of the above amounts
E) Less than any of the above amounts

Accepted Answer

The answer of A bond has a face value of...

Question 17

Shivers's annual fuel bill for home heating is 800 dollars per year.He considers three alternative plans for insulating his house.Plan A would reduce his annual fuel bill by 15%,plan B would reduce it by 20%,and plan C would eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 800 dollars,plan B would cost him 1,100,dollars,and plan C would cost him 8,800 dollars.If the interest rate is 10% and his house and the insulation job last forever,which plan is the best for Shivers?
A) Plan A.
B) Plan B.
C) Plan C.
D) Plans A and B are equally good.
E) He is best off using none of the plans.

Accepted Answer

To calculate the present value of each option, we need to use the formula:

Present Value = Future Value / (1+interest rate)^n

where n is the number of years it will take for the option to break even (i.e. for the savings on the fuel bill to equal the cost of the insulation job).

For Plan A:
Savings = $800 x 15% = $120
Present Value = $120 / (1+0.1)^1 = $109.09
Net Present Value (NPV) = -$800 + $109.09 = -$690.91

For Plan B:
Savings = $800 x 20% = $160
Present Value = $160 / (1+0.1)^1 = $145.45
NPV = -$1100 + $145.45 = -$954.55

For Plan C:
Savings = $800
Present Value = $800 / (1+0.1)^1 = $727.27
NPV = -$8800 + $727.27 = -$8072.73

Since Plan B has the highest NPV (i.e. the smallest loss), it is the best option for Shivers.

Question 18

A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $2,000 zero coupon bond will come due on January 1,2020.If the interest rate is 5% and will remain 5% forever,what will this bond be worth on January 1,2005? A) $2,000/0.5 B) $2,000/0.05¹⁵ C) $2,000 + 2,000/15 D) $2,000/1.05¹⁵ E) None of the above.

Accepted Answer

The present value of the bond can be calculated using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the face value, r is the interest rate and n is the number of years until maturity. In this case, n is 15 years (from 2005 to 2020) and r is 5%. Plugging in the values, we get PV = 2000 / (1 + 0.05)^15 = 852.15. Therefore, the bond will be worth $852.15 on January 1, 2005. The closest option is D, $2,000/1.05.

Question 19

A bond has a face value of 7,000 dollars.It will pay 700 dollars in interest at the end of every year for the next 50 years.At the time of the last interest payment,50 years from now,the company that issued the bond will redeem the bond at face value.That is,the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%,how much would a rational investor pay for this bond right now?
A) 7,000 dollars
B) 42,000 dollars
C) 35,000 dollars
D) More than any of the above amounts
E) Less than any of the above amounts

Accepted Answer

The answer of A bond has a face value of...

Question 20

Shiver's annual fuel bill for home heating is 900 dollars per year.He considers three alternative plans for insulating his house.Plan A would reduce his annual fuel bill by 15%,plan B would reduce it by 20%,and plan C would eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 900 dollars,plan B would cost him 1,600 dollars,and plan C would cost him 9,900 dollars.If the interest rate is 10% and his house and the insulation job last forever,which plan is the best for Shivers?
A) Plans A and B are equally good.
B) Plan B.
C) Plan C.
D) Plan A.
E) He is best off using none of the plans.

Accepted Answer

Plan A offers the best return on investment when considering the cost of insulation versus the annual savings and the interest rate.

Quiz 11:Asset Markets-Part A

If the interest rate is 17%,and will remain 17% forever,how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now,1,368 dollars 2 years from now,and nothing at any other time?

The sum of the terms of the infinite geometric series 1,0.86,0.862,0.863,... ,is closest to which of the following numbers?

If the rate of inflation is greater than the interest rate,

The sum of the terms of the infinite geometric series 1,0.85,0.852,0.853,... ,is closest to which of the following numbers?

A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $4,000 zero coupon bond will come due on January 1,2020.If the interest rate is 5% and will remain 5% forever,what will this bond be worth on January 1,2005?

A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $2,000 zero coupon bond will come due on January 1,2020.If the interest rate is 5% and will remain 5% forever,what will this bond be worth on January 1,2005?

The sum of the terms of the infinite geometric series 1,0.86,0.86²,0.86³,... ,is closest to which of the following numbers?

The sum of the terms of the infinite geometric series 1,0.85,0.85²,0.85³,... ,is closest to which of the following numbers?