Question 1

The decimal equivalent of a basis point is:

Accepted Answer

A) 0.0001 
B) 1.00 
C) 0.001 
D) 0.01 
A) 0.0001 
B) 1.00 
C) 0.001 
D) 0.01

Question 2

Higher savings usually requires higher interest rates because:

Accepted Answer

A) Everyone prefers to save more instead of consuming 
B) Saving requires sacrifice and people must be compensated for this sacrifice 
C) Higher savings means we expect interest rates to decrease 
D) Of the rule of 72 
A) Everyone prefers to save more instead of consuming 
B) Saving requires sacrifice and people must be compensated for this sacrifice 
C) Higher savings means we expect interest rates to decrease 
D) Of the rule of 72

Question 3

Credit:

Accepted Answer

A) Probably came into being at the same time as coinage 
B) Predates coinage by 2,000 years 
C) Did not exist until the Middle Ages 
D) First became popular due to the writings of Aristotle 
A) Probably came into being at the same time as coinage 
B) Predates coinage by 2,000 years 
C) Did not exist until the Middle Ages 
D) First became popular due to the writings of Aristotle

Question 4

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?

Accepted Answer

A) $100(1.035)3.5 
B) $100(0.35)3.5 
C) $100 x 3.5 x (1.035) 
D) $100(1.035)3/2 
A) $100(1.035)3.5 
B) $100(0.35)3.5 
C) $100 x 3.5 x (1.035) 
D) $100(1.035)3/2

Question 5

Compounding refers to:

Accepted Answer

A) The calculation of after tax interest returns 
B) The internal rate of return a firm earns on an investment 
C) The real interest return after taxes 
D) The process of earning interest on both the principal and the interest of an investment 
A) The calculation of after tax interest returns 
B) The internal rate of return a firm earns on an investment 
C) The real interest return after taxes 
D) The process of earning interest on both the principal and the interest of an investment

Question 6

Consider a bond that costs $1000 today and promises a one-time future payment of $1080 in four years.What is the approximate interest rate on this bond?

Accepted Answer

A) 2% 
B) 4% 
C) 8% 
D) 10.8% 
A) 2% 
B) 4% 
C) 8% 
D) 10.8%

Question 7

Explain why countries that have volatile inflation rates are likely to have high nominal interest rates.

Accepted Answer

You could argue that volatile inflation

Question 8

A coupon bond is a bond that:

Accepted Answer

A) Always sells at a price that is less than the face value 
B) Provides the owner with regular payments 
C) Pays the owner the sum of the coupons at the bond's maturity 
D) Pays a variable coupon rate depending on the bond's price 
A) Always sells at a price that is less than the face value 
B) Provides the owner with regular payments 
C) Pays the owner the sum of the coupons at the bond's maturity 
D) Pays a variable coupon rate depending on the bond's price

Question 9

During the early 1980s, the U.S.economy experienced an increase in interest rates quoted on U.S.Treasury debt, business loans, and mortgages.At the same time the inflation rate gradually declined more than expected.What happened to ex ante versus ex post real interest rates during this period? Use the Fisher equation to support your answer.

Accepted Answer

The Fisher equation is: i = r + @#LAT-DLM&e
The Fi

Question 10

One hundred basis points could be expressed as:

Accepted Answer

A) 0.01% 
B) 1.00% 
C) 100.0% 
D) 0.10% 
A) 0.01% 
B) 1.00% 
C) 100.0% 
D) 0.10%

Question 11

What is the present value of $500 promised four years from now at 5% annual interest?

Accepted Answer

A) $411.35 
B) $400.00 
C) $607.75 
D) $520.00 
A) $411.35 
B) $400.00 
C) $607.75 
D) $520.00

Question 12

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

Accepted Answer

A) $150.00 
B) $160.50 
C) $159.84 
D) $162.89 
A) $150.00 
B) $160.50 
C) $159.84 
D) $162.89

Question 13

The price of a coupon bond will increase as:

Accepted Answer

A) The face value decreases 
B) The yield increases 
C) The coupon payments increase 
D) The term to maturity is shorter 
A) The face value decreases 
B) The yield increases 
C) The coupon payments increase 
D) The term to maturity is shorter

Question 14

Explain why an increase in expected inflation will result in an increase in nominal interest rates, holding other factors constant.

Accepted Answer

This follows from the Fisher equation th

Question 15

We should expect a country that experiences volatile inflation to also have:

Accepted Answer

A) Volatile nominal interest rates 
B) Volatile real interest rates but stable nominal rates 
C) Stable nominal interest rates 
D) Volatile real interest rates 
A) Volatile nominal interest rates 
B) Volatile real interest rates but stable nominal rates 
C) Stable nominal interest rates 
D) Volatile real interest rates

Question 16

Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

Accepted Answer

To simply multiply $100 by 1.1

Question 17

A saver knows that if she put $95 in the bank today she will receive $100 from the bank one year from now, including the interest she will earn.What is the interest rate she is earning?

Accepted Answer

A) 5.10% 
B) 6.00% 
C) 5.52% 
D) 5.26% 
A) 5.10% 
B) 6.00% 
C) 5.52% 
D) 5.26%

Question 18

You are considering purchasing a home.You find one that you like but you realize that you will need to obtain a mortgage for $100,000.The mortgage company presents you with two options: a 15-year mortgage at a 6.0% annual rate and a 30-year mortgage at a 6.5% annual rate.What will be the fixed annual payment for each mortgage?

Accepted Answer

Using a financial calculator or a spread

Question 19

Which of the following is necessarily true of coupon bonds?

Accepted Answer

A) The price exceeds the face value 
B) The coupon rate exceeds the interest rate 
C) The price is equal to the coupon payments 
D) The price is the sum of the present value of coupon payments and the face value 
A) The price exceeds the face value 
B) The coupon rate exceeds the interest rate 
C) The price is equal to the coupon payments 
D) The price is the sum of the present value of coupon payments and the face value

Question 20

A credit card that charges a monthly interest rate of 1.5% has an effective annual interest rate of:

Accepted Answer

A) 18.0% 
B) 19.6% 
C) 15.0% 
D) 17.50% 
A) 18.0% 
B) 19.6% 
C) 15.0% 
D) 17.50%

Exam 4: Future Value, Present Value, and Interest Rates

The decimal equivalent of a basis point is:

Higher savings usually requires higher interest rates because:

Credit:

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?

Compounding refers to:

Consider a bond that costs $1000 today and promises a one-time future payment of $1080 in four years.What is the approximate interest rate on this bond?

Explain why countries that have volatile inflation rates are likely to have high nominal interest rates.

A coupon bond is a bond that:

One hundred basis points could be expressed as:

What is the present value of $500 promised four years from now at 5% annual interest?

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

The price of a coupon bond will increase as:

Explain why an increase in expected inflation will result in an increase in nominal interest rates, holding other factors constant.

We should expect a country that experiences volatile inflation to also have:

Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

A saver knows that if she put $95 in the bank today she will receive $100 from the bank one year from now, including the interest she will earn.What is the interest rate she is earning?

Which of the following is necessarily true of coupon bonds?

A credit card that charges a monthly interest rate of 1.5% has an effective annual interest rate of:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: the Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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