Money and Banking Chapter 3 Review
You are borrowing money to buy a car. If you can make payments of $250 per month starting one month from now at an interest rate of 9%, how much will you be able to borrow for the car today if you finance the amount over 5 years?
$12,043.34
f the current rate of interest is 7%, then the present value (PV) of an investment that pays $1400 per year and lasts 18 years is closest to
$14,083
An annuity pays $15 per year for 94 years. What is the present value (PV) of this annuity given that the discount rate is 9%?
$166.62
Clarissa wants to fund a growing perpetuity that will pay $11,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 4% per year. Given that the interest rate is 10%, how much does she need to fund this perpetuity?
$183,333.33
With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately
$2,000.
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments?
Investment Y has a higher present value.
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? Year Investment X Investment Y 1 $5,000 $11,000 2 $7,000 $9,000 3 $9,000 $7,000 4 $11,000 $5,000
Investment Y has a higher present value.
A debt instrument represents
a promise by a borrower to repay principal plus interest to a lender.
When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.
adverse selection
A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that
both involve funds being channeled from savers to borrowers through financial intermediaries.
A debt security that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
coupon bond.
A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.
coupon bond; face
The ________ is calculated by multiplying the coupon rate times the par value of the bond.
coupon payment
The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's
coupon rate.
The ________ is the final amount that will be paid to the holder of a coupon bond.
face value
The present value of an expected future payment ________ as the interest rate increases.
falls
Diversification refers to the
splitting of wealth into many assets.
You are saving money to buy a car. If you save $290 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 5 years?
$20,233.31
If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payments every year will total
$37.50.
If the annual interest rate is 8%, what would you expect to pay for a bond paying a lump sum of $10,000 in ten years?
$4,632
What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?
$453.51
sume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 3% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. The present value (PV) (at age 30) of your retirement savings is closest to
$58,916
If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years?
$638
If a $5,000 coupon bond has a coupon rate of 13 percent, then the total coupon payment every year would be
$650
Since your first birthday, your grandparents have been depositing $110 into a savings account every month. The account pays 12% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.
$83,365
An annuity is set up that will pay $1300 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%?
$8343
Suppose Matt's New Cars issues a bond in which they'll need to pay $10,000 in one year, which includes 4% interest. How much will they receive for the bond?
$9,615
With an interest rate of 6 percent, the present value of $100 next year is approximately
$94
The presence of transaction costs in financial markets explains, in part, why
financial intermediaries and indirect finance play such an important role in financial markets.
Which of the following will lead to a higher interest rate on a loan?
increased perceived risk of default
A discount bond involves
payment by the borrower to the lender of the face value of the loan at maturity.
The price of a financial asset equals the
present value of all future payments.
A discount bond resembles a simple loan in that
the borrower repays in a single payment.
When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the
adverse selection problem.
The coupon rate is the
annual coupon payment divided by the face value of the bond.
The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets
asymmetric information
A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a
discount bond.
The process of calculating what dollars received in the future are worth today is called
discounting the future.