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Basic Tools Of Finance Essay

3667 words - 15 pages

Ch26-Basic Tools of Finance

1. The future value of a deposit in a savings account will be larger
a. the longer a person waits to withdraw the funds.
b. the higher the interest rate is.
c. the larger the initial deposit is.
d. All of the above are correct.

2. Edgar has four savings accounts. Which one has the most in it?
a. $100 deposited 1 year ago at an 8% interest rate.
b. $100 deposited 2 years ago at a 4% interest rate.
c. $100 deposited 4 years ago at a 2% interest rate.
d. $100 deposited 8 years ago at a 1% interest rate.

3. Suppose that the price of a bond is equal to the sum of the present value of its future payments. Suppose ...view middle of the document...

$1,000 ( (1.06)
b. $1,000(1.06)
c. $1,000/(1.06)
d. None of the above is correct.

7. Which of the following changes would increase the present value of a future payment?
a. a decrease in the size of the payment
b. an increase in the time until the payment is made
c. a decrease in the interest rate
d. All of the above are correct.

8. You are expecting to receive $1,000 at some time in the future. Which of the following would unambiguously decrease the present value of this future payment?
a. Interest rates rise and you get the payment sooner.
b. Interest rates rise and you have to wait longer for the payment.
c. Interest rates fall and you get the payment sooner.
d. Interest rates fall and you have to wait longer to get the payment.

9. Suppose that the price of a bond is equal to the sum of the present value of its future payments. Suppose further that the bond pays $50 today, $50 one year from today, and $1,050 two years from today. What is the price of this bond if the interest rate is 5 percent?
a. $1,000
b. $1,050
c. $1,100
d. None of the above is correct.

10. A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?
a. 3%
b. 4%
c. 5%
d. 6%

11. Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?
a. both interest rates and price of trucks rise
b. both interest rates and the price of trucks fall
c. the interest rate rises and the price of trucks fall
d. the interest rate falls and the price of trucks rises

12. A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?
a. Option A
b. Option B
c. Option C
d. All have the same present value

13. Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded
a. rise, and investment spending rise.
b. rise, and investment spending fall.
c. fall, and investment spending rise.
d. fall, and investment spending fall.

14. A measure of the volatility of a variable is its
a. present value.
b. future value.

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