Question 1

If the interest rate is 5 percent,what is the present value of a payment of $500 to be made one year from today?

Accepted Answer

A) $457.14 
B) $475.00 
C) $480.77 
D) None of the above are correct to the nearest penny. 
A) $457.14 
B) $475.00 
C) $480.77 
D) None of the above are correct to the nearest penny.

Question 2

Of the following interest rates which is the highest one at which the present value of $200 ten years from today is greater than $150?

Accepted Answer

A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent 
A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent

Question 3

If you put $125 into an account that paid 1.25 percent interest how much money to the nearest penny,would you have in the account in two years?

Accepted Answer

A) $129.73 
B) $128.14 
C) $127.15 
D) $125.13 
A) $129.73 
B) $128.14 
C) $127.15 
D) $125.13

Question 4

In the late 1990s,Fed Chair Alan Greenspan believed that the market was

Accepted Answer

A) undervalued, and evidence later showed that this was clearly correct. 
B) undervalued, but whether it was remains debatable. 
C) overvalued, and evidence later showed that this was clearly correct. 
D) overvalued, but whether it was remains debatable. 
A) undervalued, and evidence later showed that this was clearly correct. 
B) undervalued, but whether it was remains debatable. 
C) overvalued, and evidence later showed that this was clearly correct. 
D) overvalued, but whether it was remains debatable.

Question 5

Twenty years ago,Dr.Montgomery borrowed money from her parents to pay her tuition at graduate school.Now she wants to pay them back.She gives them double what they gave her.According to the rule of 70,what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?

Accepted Answer

A) 3.5 percent 
B) 4.5 percent 
C) 5 percent 
D) 7 percent 
A) 3.5 percent 
B) 4.5 percent 
C) 5 percent 
D) 7 percent

Question 6

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

Accepted Answer

For example at 3 percent the p

Question 7

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

Accepted Answer

A) 3 years 
B) 3.5 years 
C) 4 years 
D) 4.5 years 
A) 3 years 
B) 3.5 years 
C) 4 years 
D) 4.5 years

Question 8

Which of the following changes would increase the present value of a future payment?

Accepted Answer

A) an increase in the size of the payment 
B) an increase in the time until the payment is made 
C) an increase in the interest rate 
D) All of the above are correct. 
A) an increase in the size of the payment 
B) an increase in the time until the payment is made 
C) an increase in the interest rate 
D) All of the above are correct.

Question 9

The field of finance primarily studies

Accepted Answer

A) how society manages its scarce resources. 
B) the implications of time and risk for allocating resources over time. 
C) firms decisions concerning how much to produce and what price to charge. 
D) how society can reduce market risk. 
A) how society manages its scarce resources. 
B) the implications of time and risk for allocating resources over time. 
C) firms decisions concerning how much to produce and what price to charge. 
D) how society can reduce market risk.

Question 10

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Accepted Answer

A) True 
 B)False

Question 11

Alex says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest.Brian says that the present value of $400 one year from today if the interest rate is 4 percent is more than the present value of $400 two years from today if the interest rate is 2 percent.

Accepted Answer

A) Alex and Brian are both correct. 
B) Alex and Brian are both incorrect. 
C) Only Alex is correct. 
D) Only Brian is correct. 
A) Alex and Brian are both correct. 
B) Alex and Brian are both incorrect. 
C) Only Alex is correct. 
D) Only Brian is correct.

Question 12

Brittany wants to have about $500,000 when she retires in 10 years.She has $200,000 to deposit now.Which of the following interest rates would get her savings the closest to $500,000?

Accepted Answer

A) 9.6 percent 
B) 9.8 percent 
C) 10 percent 
D) 10.2 percent 
A) 9.6 percent 
B) 9.8 percent 
C) 10 percent 
D) 10.2 percent

Question 13

Suppose that fundamental analysis shows a stock is overvalued

Accepted Answer

A) This means its present value is less than its price.You should consider adding the stock to your portfolio. 
B) This means its present value is less than its price.You shouldn't consider adding the stock to your portfolio. 
C) This means its present value is more than its price.You should consider adding the stock to your portfolio. 
D) This means its present value is more than its price.You shouldn't consider adding the stock to your portfolio. 
A) This means its present value is less than its price.You should consider adding the stock to your portfolio. 
B) This means its present value is less than its price.You shouldn't consider adding the stock to your portfolio. 
C) This means its present value is more than its price.You should consider adding the stock to your portfolio. 
D) This means its present value is more than its price.You shouldn't consider adding the stock to your portfolio.

Question 14

George knows that he has about $95 dollars in his account.He knows he earned an interest rate of 4 percent,but he doesn't remember how much he opened the account with a year ago.How much did he put in?

Accepted Answer

A) $91.00 
B) $91.20 
C) $91.27 
D) $91.35 
A) $91.00 
B) $91.20 
C) $91.27 
D) $91.35

Question 15

As the interest rate increases,the present value of future sums decrease,so firms will find fewer investment projects profitable.

Accepted Answer

A) True 
 B)False

Question 16

Write the rule of 70.Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600.Use the rule of 70 to determine about what interest rate she earned.

Accepted Answer

$1,600/$50 = 32.The rule of 70 says that

Question 17

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: receive $2,000 five years from now.The interest rate is 15% per year.Rank these three options from highest present value to lowest present value.

Accepted Answer

A) Option 1; Option 2; Option 3 
B) Option 3; Option 2; Option 1 
C) Option 2; Option 3; Option 1 
D) Option 3; Option 1; Option 2 
A) Option 1; Option 2; Option 3 
B) Option 3; Option 2; Option 1 
C) Option 2; Option 3; Option 1 
D) Option 3; Option 1; Option 2

Question 18

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by

Question 19

John says that the future value of $250 saved for one year at 6 percent is less than the future value of $250 saved for two years at 3 percent.George says that the present value of a $250 payment in one year when the interest rate is 6 percent is less than the value of a $250 payment in two years when the interest rate is 3 percent.

Accepted Answer

A) John and George are both correct. 
B) John and George are both incorrect. 
C) Only John is correct. 
D) Only George is correct. 
A) John and George are both correct. 
B) John and George are both incorrect. 
C) Only John is correct. 
D) Only George is correct.

Question 20

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Accepted Answer

A) 5 
B) 7 
C) 9 
D) 11 
A) 5 
B) 7 
C) 9 
D) 11

Exam 27: The Basic Tools of Finance

If the interest rate is 5 percent,what is the present value of a payment of $500 to be made one year from today?

Of the following interest rates which is the highest one at which the present value of $200 ten years from today is greater than $150?

If you put $125 into an account that paid 1.25 percent interest how much money to the nearest penny,would you have in the account in two years?

In the late 1990s,Fed Chair Alan Greenspan believed that the market was

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

Which of the following changes would increase the present value of a future payment?

The field of finance primarily studies

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Brittany wants to have about $500,000 when she retires in 10 years.She has $200,000 to deposit now.Which of the following interest rates would get her savings the closest to $500,000?

Suppose that fundamental analysis shows a stock is overvalued

George knows that he has about $95 dollars in his account.He knows he earned an interest rate of 4 percent,but he doesn't remember how much he opened the account with a year ago.How much did he put in?

As the interest rate increases,the present value of future sums decrease,so firms will find fewer investment projects profitable.

Write the rule of 70.Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600.Use the rule of 70 to determine about what interest rate she earned.

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: receive $2,000 five years from now.The interest rate is 15% per year.Rank these three options from highest present value to lowest present value.

List three different ways that a risk-averse person can reduce financial risk.

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

Supply, demand, and Government Policies

Consumers, producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Oligopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short Run Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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