Question 1

If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that:

Accepted Answer

A) Is at least 7% 
B) Is anything above 0% 
C) Equals the real rate desired plus expected inflation 
D) Equals the real rate desired less expected inflation 
A) Is at least 7% 
B) Is anything above 0% 
C) Equals the real rate desired plus expected inflation 
D) Equals the real rate desired less expected inflation

Question 2

Tom deposits funds in his savings account at the bank which is paying 3.5% interest.If he keeps his funds in the bank for one year he will have $155.25.What amount is Tom depositing?

Accepted Answer

A) $151.75 
B) $150.00 
C) $148.75 
D) $147.50 
A) $151.75 
B) $150.00 
C) $148.75 
D) $147.50

Question 3

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

Accepted Answer

A) The ex ante real interest rate is 5% 
B) The lender benefits more than the borrower because of the difference in the nominal versus real interest rates 
C) At the end of the year, the borrower pays only 5% in nominal interest 
D) The ex post real interest rate 11% 
A) The ex ante real interest rate is 5% 
B) The lender benefits more than the borrower because of the difference in the nominal versus real interest rates 
C) At the end of the year, the borrower pays only 5% in nominal interest 
D) The ex post real interest rate 11%

Question 4

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

Accepted Answer

A) PV + i 
B) FV/i 
C) PV (1 + i) 
D) PV/i 
A) PV + i 
B) FV/i 
C) PV (1 + i) 
D) PV/i

Question 5

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

Accepted Answer

A) Coupon rates 
B) Ex ante real interest rates 
C) Ex post real interest rates 
D) Nominal interest rates 
A) Coupon rates 
B) Ex ante real interest rates 
C) Ex post real interest rates 
D) Nominal interest rates

Question 6

Doubling the future value will cause:

Accepted Answer

A) The present value to double 
B) The present value to decrease 
C) The present value to increase by less than 100% 
D) The interest rate, i, to decrease 
A) The present value to double 
B) The present value to decrease 
C) The present value to increase by less than 100% 
D) The interest rate, i, to decrease

Question 7

As inflation increases, for any fixed nominal interest rate, the real interest rate:

Accepted Answer

A) Also increases 
B) Remains the same, that's why it is real 
C) Decreases 
D) Decreases by less than the increase in inflation 
A) Also increases 
B) Remains the same, that's why it is real 
C) Decreases 
D) Decreases by less than the increase in inflation

Question 8

A borrower is offered a choice between a fixed rate mortgage and a variable rate mortgage.The variable rate mortgage may be more attractive to the lender if the lender expects:

Accepted Answer

A) Inflation to decrease 
B) The home price to decrease 
C) The home price to increase 
D) Inflation to increase 
A) Inflation to decrease 
B) The home price to decrease 
C) The home price to increase 
D) Inflation to increase

Question 9

An investment grows from $2,000 to $2,750 over the period of 10 years.What average annual growth rate will produce this result?

Accepted Answer

First we determine the overall percentag

Question 10

Which of the following expresses 5.65%?

Accepted Answer

A) 0.565 
B) 0.00565 
C) 5.65 
D) 0.0565 
A) 0.565 
B) 0.00565 
C) 5.65 
D) 0.0565

Question 11

What matters more: having a credit card with a low rate or paying off your balance as quickly as possible? Explain.

Accepted Answer

Whatever the rate of interest on your cr

Question 12

Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.

Accepted Answer

We can use a calculator and the formula

Question 13

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

Accepted Answer

Using the Fisher equation (that says the

Question 14

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

Accepted Answer

A) ($500/4.25) x (1+i) 
B) $500 x 4.25 x (1 +i) 
C) $500/(1+i)4.25 
D) ($500/4) x (1+i)3 
A) ($500/4.25) x (1+i) 
B) $500 x 4.25 x (1 +i) 
C) $500/(1+i)4.25 
D) ($500/4) x (1+i)3

Question 15

In the data, we observe that countries with high inflation rates tend to have high nominal interest rates.What does this imply, if anything, about real interest rates in countries with very high inflation rates?

Accepted Answer

The higher nominal interest ra

Question 16

Explain why the Fisher equation is not highly accurate at high rates of inflation.Use an example.

Accepted Answer

Consider a lender who loans $100 for a y

Question 17

If a bond has a face value of $1,000 and the bondholder receives coupon payments of $27.50 semi-annually, the bond's coupon rate is:

Accepted Answer

A) 2.75% 
B) 5.50% 
C) 27.5% 
D) A value that cannot be determined from the information provided 
A) 2.75% 
B) 5.50% 
C) 27.5% 
D) A value that cannot be determined from the information provided

Question 18

The present value and the interest rate have:

Accepted Answer

A) A direct relationship; they both move together 
B) An inverse relationship; as i increases, PV decreases 
C) An unclear relationship; whether it is direct or inverse depends on the interest rate 
D) No relationship 
A) A direct relationship; they both move together 
B) An inverse relationship; as i increases, PV decreases 
C) An unclear relationship; whether it is direct or inverse depends on the interest rate 
D) No relationship

Question 19

A lender is promised a $100 payment (including interest) one year from today.If the lender has a 6% opportunity cost of money, he/she should be willing to accept what amount today?

Accepted Answer

A) $100.00 
B) $106.20 
C) $96.40 
D) $94.34 
A) $100.00 
B) $106.20 
C) $96.40 
D) $94.34

Question 20

What is the present value of $200 promised two years from now at 5% annual interest?

Accepted Answer

A) $190.00 
B) $220.00 
C) $180.00 
D) $181.41 
A) $190.00 
B) $220.00 
C) $180.00 
D) $181.41

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

If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she should charge a nominal interest rate that:

Tom deposits funds in his savings account at the bank which is paying 3.5% interest.If he keeps his funds in the bank for one year he will have $155.25.What amount is Tom depositing?

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

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

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

Doubling the future value will cause:

As inflation increases, for any fixed nominal interest rate, the real interest rate:

A borrower is offered a choice between a fixed rate mortgage and a variable rate mortgage.The variable rate mortgage may be more attractive to the lender if the lender expects:

An investment grows from $2,000 to $2,750 over the period of 10 years.What average annual growth rate will produce this result?

Which of the following expresses 5.65%?

What matters more: having a credit card with a low rate or paying off your balance as quickly as possible? Explain.

Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.

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

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

In the data, we observe that countries with high inflation rates tend to have high nominal interest rates.What does this imply, if anything, about real interest rates in countries with very high inflation rates?

Explain why the Fisher equation is not highly accurate at high rates of inflation.Use an example.

If a bond has a face value of $1,000 and the bondholder receives coupon payments of $27.50 semi-annually, the bond's coupon rate is:

The present value and the interest rate have:

A lender is promised a $100 payment (including interest) one year from today.If the lender has a 6% opportunity cost of money, he/she should be willing to accept what amount today?

What is the present value of $200 promised two years from now at 5% annual interest?

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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