Chapter 4

The future value of $200 that is left in account earning 6.5% interest for three years is best expressed by which of the following?

$200(1.065)^3

An investor deposits $400 into a bank account that earns an annual interest rate of 8%. Based on this information, how much interest will he earn during the second year alone?

$34.56

If a bond has a face value of $1,000 and a coupon rate of 4,25%, the bond owner will receive annual coupon payment of:

$42.50

Consider a bond that costs $1,000 today and promises a one-time payment of $1,080 in four years. What is the approximately interest rate on this bond?

2%

If a bond has a face value of $1000 and the bond holder receives coupon payments of $27.50 semi-annually, the bond's coupon rate is:

5.50%

A monthly growth rate of 0.5% is an annual growth rate of:

6.17%

In reading the national business news, you hear that mortgage rates increased by 50 basis points. If mortgage rates were initially at 6.5%, what are they after this increase?

7.0%

A monthly growth rate of 0.6% is an annual growth rate of:

7.44%

According to the rule of 72:

72/interest rate is the number of years approximately it will take for an amount to double

If the interest rate is zero, a promise to receive a $100 payment one year from now is:

equal in value to receiving $100 today

A promise of a $100 payment to be received one year from today is:

equally valuable as a payment received today if the interest rate is zero

Interest rates that are adjusted for expected inflation are known as:

ex ante real interest rates

The internal rate of return of an investment is:

the interest rate that equals the present value of an investment with its cost

Which of the following is necessarily true of coupon bonds?

the price is the sum of the present value of a coupon payments and the face value

The interest rate that equals the price of a bond with the present value of its payments:

will vary inversely with the value of the bond

What is the future value of $1,000 after six months earning 12% annually?

$1,058.30

Which of the following best expresses the future value of $100 left in a savings account earning 3.5% for three and a half years?

$100(1.035)^3.5

The future value of $100 that earns 10% annually for n years is best expressed by which of the following?

$100(1.1)^n

The value of $100 left in a certificate of deposit for four years than earns 4.5% annually will be:

$119.25

The value of $100 left in savings account earning 5% a year, will be worth what amount after ten years?

$162.89

Which of the following best expresses the present value of $500 that you have to wait four years and three months to receive?

$500/(1+i)^4.25

The decimal equivalent of a basis point is:

0.0001

If 10% is the annual rate, considering compounding, the monthly rate is:

0.80%

One hundred basis points could be expressed as:

1.00%

The rule of 72 says that at 6% interest $100 should be become $200 in about:

12 years

A monthly interest rate of 1% is a compound annual rate of:

12.68%

Which of the following best expresses the payment a lender receives for lending money for three years?

PV/(1+i)^3

Which following best expresses the proceeds a lender receives from a one-year simple loan when the annual interest rate equals i?

PV(1+i)

Which of the following best expresses the payment a saver receives for investing their money for two years?

PV(1+i)^2

The price of a coupon bond is determined by taking the present value of:

all of the bond's payments

The present value and the interest rate have:

an inverse relation; as i increases, pv decreases

The coupon rate for a coupon bond is equal to the:

annual coupon payment divided by the face value of the bond

An investment carrying a current cost of $120,000 is going to generate $50,000 of revenue for each of the next three years. To calculate the internal rate of return we need to:

find the interest rate at which the sum of the present value of $50,000 for each of the next three years equal $120,000

A mortgage, where the monthly payment are the same for the duration of the loan, is an example of a(n):

fixed payment loan

A change in the interest rate:

has a larger impact on the present value of a payment to be made far into the future than on one to be made sooner

The lower the interest rate, i, the:

higher is the present value

The higher the future value of the payment the:

higher the present value

The shorter the time until a payment the:

higher the present value

If a saver has a positive rate of time presence then the present value of $100 to be received 1 year from today is:

less than 100

If the internal rate of return from an investment is more than the opportunity cost of funds the firm should:

make the investment

Credit:

predates coinage by 2,000 years

Doubling the future value will cause:

present value to double

A coupon bond is a bond that:

provides the owner with regular payments

At any fixed interest rate, an increase in time, n, until a payment is made:

reduces the present value

Higher savings usually requires higher interest rates because:

saving requires sacrifice and people must be compensated for this sacrifice

The price of a coupon bond is determined by:

taking the present value of all of the bond's payments

The price of a coupon bond will increase as the:

term to maturity is shorter

The coupon rate is:

the annual amount of interest payments made on a bond as a percentage of the amount borrowed

Usually an investment will be profitable if:

the cost of borrowing is less than the internal rate of return

Suppose the nominal interest on a one-year loan is 8% and the inflation rate is expected to be 3% over the next year. Based on this information, we know:

the ex ante real interest rate is 5%