Econ Chapter 4

At an interest rate of 5% and a final payment of $10,000 to be made in 25 years, the present value of the final payment equals ______. a. $10,000.00 b. $380.95 c. $9,523.80 d. $2,953.03

d. $2,953.03

Which of the following is the future value of a $1,000 bond at 6% interest that matures in eight years, rounded to the nearest dollar? a. $1,594 b. $1,587 c. $42,950 d. $627

A. $1,594

Assuming the chances of being paid back are the same, would a nominal interest rate of 10 percent always be more attractive to a lender than a nominal rate of 5 percent? A. Not always. Lenders are concerned with the real return they receive. B. Not always. It depends on what month of the year it is. C. Yes, because the lender is paid the interest rate, the higher rate is always more attractive. D. Yes, because a 10 percent nominal interest rate versus a 5 percent nominal interest rate means the lender is receiving greater compensation for inflation.

A. Not always. Lenders are concerned with the real return they receive.

Which of the following is true about compound interest? a.It results in a lower future value than if interest were not compounded. b. It is interest earned on interest. c. It is not relevant to calculations of present value, only future value. d. It is interest earned on principal.

B. It is interest earned on interest.

Assuming the chances of being paid back are the same, would a nominal interest rate of 8 percent always be more attractive to a lender than a nominal rate of 4 percent? A. Yes, a nominal interest rate of 8 percent versus a nominal rate of 4 percent means the lender is receiving greater compensation for inflation. B. Not always. Lenders are concerned with the real return they receive. C. Yes, because the lender is paid the interest rate, the higher rate is always more attractive. D. Not always. It depends on what month of the year it is.

B. Not always. Lenders are concerned with the real return they receive.

If the current interest rate increases, what would you expect to happen to bond prices? A. You would expect bond prices to increase because bond prices are the sum of the present values of the future payments associated with the bond. The higher the interest rate, the higher the present value of these payments. B. You would expect bond prices to fall because bond prices are the sum of the present values of the future payments associated with the bond. The higher the interest rate, the lower the present value of these payments. C. Bond prices and interest rates are unrelated, so you should expect no change in bond prices. D. You would expect bond prices to increase because bond prices and interest rates are positively related.

B. You would expect bond prices to fall because bond prices are the sum of the present values of the future payments associated with the bond. The higher the interest rate, the lower the present value of these payments.

The future value of an investment increases in the presence of "interest on interest," which is also known as ______. a. simple interest b. compound interest c. future interest d. present interest

B. compound interest

An interest rate that is expressed in current-dollar terms is called ______. A. the real interest rate B. the present value interest rate C, the nominal interest rate D. internal rate of interest

C. the nominal interest rate

Suppose you are borrowing $2,500,000 over 30 years at 4%. Determine the annual payment amount. A. $10,629.25 B. $83,333.33 C. $100,000 D. $127,551.02

D. $127,551.02

You own a factory that produces clothing and are wondering whether you should borrow to purchase a new machine that processes textiles. To make your decision. you should set the present value of the revenues generated by the machine equal to _______. a. the future value of the revenues generated with your current machinery b. the payments you could receive by buying bonds with your money instead c. the cost of the machine d. the interest payments you will make on the loan

c. the cost of the machine

On the maturity date of a coupon bond, the bond issuer will pay a. the value of the bond less any coupon payments. b. the first coupon payment on the bond. c. the face value of the bond. d. the value of the bond plus all coupon payments.

c. the face value of the bond.

The interest rate that equates the present value of an investment with its cost is called ______. a. the future value b. compound rate of return c. the internal rate of return d. the present rate of return

c. the internal rate of return

The future value of a financial investment ________ as its time to maturity increases due to _______. a. falls; compound interest b. rises; inflation c. rises; compound interest d. falls; inflation

c.rises; compound interest

Suppose you borrow $100,000 at 3% interest over 15 years. If you have 15 payments (one each year) of equal amounts, then you have taken a(n) ______. a. present value loan b. variable rate loan c. equity loan d. fixed-rate loan

d. fixed-rate loan

Suppose you are considering borrowing money to purchase a new piece of capital for your firm. You should borrow the money for the capital so long as the a. future value of the loan is a fixed-rate financial device. b. cost of borrowing exceeds the internal rate of return. c. present value of the loan is a variable-rate financial device. d. internal rate of return exceed the cost of borrowing.

d. internal rate of return exceed the cost of borrowing.

Under what circumstances might you be willing to pay more than $1,000 for a coupon bond that matures in three years and has a coupon rate of 10 percent and a face value of $1,000? If the interest rate in the market were _____ than 10 percent, the present value of the payment flows associated with the bond would be ___ than $1,000

less, higher

Which of the following is NOT a property of present value? a. The size of the present payment b. The size of the future payment c. The time until the payment is made d. The interest rate

a. The size of the present payment

We can tell from the present value formula that, all else equal, present value falls when which of the following occurs? a. The time until payment rises. b. Its future value rises. c. Its value in today's dollars rises. d. The interest rate falls.

a. The time until payment rises.

Which of the following is a property of present value? (more than 1 answer) a. The interest rate b. The size of the present payment c. The time until the payment is made d. The size of the future payment

a. the interest rate c. The time until the payment is made d. The size of the future payment

We expect (all else equal) present value to be higher when a. the interest rate is lower. b.the time until payment is longer. c. the value of the future payment is smaller. d.the need for the payment increases.

a. the interest rate is lower.

Future value is a. the value on some future date of an investment made today. b. the value today of an investment made in the future. c. the value today of an investment made today. d. the value on some future date of an investment made in the future.

a. the value on some future date of an investment made today.

You are reliably told that in ten years you'll receive $5,000. If the interest rate over that ten-year period is 2%, which of the following is the amount that sum is worth in today's dollars, rounded to the nearest dollar? A. $4,132 B. $4,102 C. $808 D. $6,095

b. $4,102

Bonds are issued by a. only businesses. b. both businesses and the government. c. only the government. d. businesses, the government, and households.

b. both businesses and the government.

The internal rate of return can be defined as the interest rate that equates a. interest paid on a government bond with interest paid on a corporate bond. b. the present value of an investment with its cost. c. interest paid with interest received on a loan. d. the cost of an investment with its future value.

b. the present value of an investment with its cost.

An inflation-adjusted interest rate is called ______. a. the nominal interest rate b. the real interest rate c. internal rate of interest d. the present value interest rate

b. the real interest rate

In general, an investment should be made if its internal rate of return a. is less than the cost of borrowing to make the investment. b.is greater than the cost of borrowing to make the investment. c. is exactly equal to the cost of borrowing to make the investment.

b.is greater than the cost of borrowing to make the investment.

$8,000 to be paid to you in five years at an interest rate of 3% is worth approximately ______ today a. $7,812.50 b. $9,274.19 c. $6,900.87 d. $6,910.70

c. $6900.87

The value of a coupon bond varies _____ with the value of its yearly coupon payments and _______ with the interest rate paid on it. a. inversely; directly b. inversely; inversely c. directly; inversely d. directly; directly

c. directly; inversely

After figuring out the amount of money you'll need to retire comfortably, you calculate the amount you'll need to invest now to have that amount when you retire in twenty years. To do so, you should calculate ______. a. opportunity cost b. future value c. present value d. compound interest

c. present value

Present value refers to a. the future value of all present-day investments. b. interest that is paid on interest. c. the amount that must be invested today to realize a specific amount in the future. d. the amount that must be invested in the future based on a present-day investment.

c. the amount that must be invested today to realize a specific amount in the future.

Which would be most affected in the event of an interest rate increase—the price of a five-year coupon bond that paid coupons only in years 3, 4, and 5 or the price of a five-year coupon bond that paid coupons only in years 1, 2, and 3, everything else being equal? Explain. A. The price of the bond with payments in years 3, 4, and 5. The payments are made further into the future, so the change in the interest rate has a greater impact on its present value. B. The price of the bond with payments in years 3, 4, and 5. Because the price of that bond must be higher than the price of the bond with earlier payments, it is more affected by the interest rate change. C. The price of the bond with payments in years 1, 2, and 3. Because time has value, the bond price with earlier payments is more affected by the interest rate increase. D. The price of the bond with payments in years 1, 2, and 3. Because you are expecting the payments sooner, you are more affected by the interest rate increase.

A. The price of the bond with payments in years 3, 4, and 5. The payments are made further into the future, so the change in the interest rate has a greater impact on its present value.

Which of the following refer to present value? (more than one answer) A. The value today of a payment that is promised in the future. B. It is sometimes called present discounted value. C. It is an integral component of the computation of the price of all financial instruments. D. It is that value in the future of a payment made today.

A. The value today of a payment that is promised in the future. B. It is sometimes called present discounted value. C. It is an integral component of the computation of the price of all financial instruments.

If the current coupon rate increases, what would you expect to happen to bond prices? A. You would expect bond prices to increase since bond prices are the sum of the present values of the future payments associated with the bond. B. Bond prices will be unaffected, so you should expect no change in bond prices. C. You would expect bond prices to fall because bond prices and interest rates are positively related. D. You would expect bond prices to increase because bond prices and interest rates are positively related.

A. You would expect bond prices to increase since bond prices are the sum of the present values of the future payments associated with the bond.

When an investment is repaid over more than one year, it is subject to interest on the interest, which is also known as ______. A. compound interest B. future interest C. future yield D. simple interest

A. compound interest

If we are promised a sum at some point in the future and want to know how much it is worth today, we should calculate _________ value. a. present b. future c. weighted d. expected

A. present

A borrower who needs $15,000 issues a coupon bond for that amount, with an annual coupon rate of 10%, that will mature in 10 years. The yearly coupon payment for this bond would be ______. A. $150 B. $1,500 C. $5,000 D. $550

B. $1,500

The present value of three consecutive, yearly, $50 payments made at 5% interest is _____. A. $43.19 B. $136.16 C. $18.33 D. $92.97

B. $136.16

The present value of a bond that matures in 21 months is $2,500. At 4% interest rate, compounded annually, the future value of the bond is equal to _____. A. $5,359 B. $2,678 C. $5,697 D. $2,334

B. $2,678

Which of the following is true about coupon bonds? A. A coupon bond's coupon payment refers to the coupon bond's value at maturity. B. Coupon bonds are the most common type of bond. C. Coupon bonds pay interest all at once, at maturity, in terms of the difference between the price paid and the price for which the bond is redeemed. D. A coupon bond's maturity date is the date on which the coupon bond is purchased.

B. Coupon bonds are the most common type of bond.

Which of the following would we calculate to determine future value? A. How much our expected yearly income after college is worth today B. How much a financial investment made today will be worth later C. How much a given amount of money today can buy in the future, given inflation D. How much an expected future payment is worth today

B. How much a financial investment made today will be worth later

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