Question 1

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?
A)$4
B)$8
C)$16
D)$32

Accepted Answer

Using the rule of 70, we divide 70 by the interest rate (2%) to find the approximate number of years it takes for the money to double: 70/2 = 35 years. Since we are looking at 140 years, we can divide that by 35 to see how many times the money would have doubled: 140/35 = 4 times. So the initial $1 would have doubled 4 times, resulting in $1 x 2 x 2 x 2 x 2 = $16. Therefore, the correct answer is (C) $16.

Question 2

Will is risk averse and has $1,000 with which to make a financial investment. He has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Will should choose
A)option A.
B)option B.
C)option C.
D)either option A or option B because Will is indifferent between those two options and they are superior to option C.

Accepted Answer

Will is risk averse and therefore prefers a guaranteed return on his investment. Option A is a risk-free government bond that guarantees a 5 percent return each year for two years. Option B and C both involve some level of risk and are not guaranteed. Therefore, option A is the best choice for Will.

Question 3

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?
A)$12,000
B)$14,000
C)$15,500
D)$20,000

Accepted Answer

The answer of Rita puts $10,000 into each of two...

Question 4

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?
A)3.5
B)7
C)14
D)None of the above is correct.

Accepted Answer

The rule of 70 states that if you divide 70 by the interest rate, you get the number of years it takes for an investment to double. Therefore, if a person's savings double in 10 years, 70 divided by 10 is 7. This means that the person was earning an interest rate of 7%.

Question 5

If the interest rate is r percent, then the rule of 70 says that your savings will double about every
A)70/(1 - r) years.
B)70/(1 + r) years.
C)70/r years.
D)70(1 + r)/r years.

Accepted Answer

The answer of If the interest rate is r percent,...

Question 6

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?
A)5 percent
B)7 percent
C)10 percent
D)14 percent

Accepted Answer

The answer of Nancy would like to double the money...

Question 7

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.

Accepted Answer

An increase in the interest rate makes borrowing more expensive, which decreases the quantity of loanable funds demanded and reduces investment spending, as firms are less likely to borrow money for investment projects when interest rates are high.

Question 8

Which of the following is the largest?
A)the future value of $250 with 3% interest for 2 years
B)the future value of $250 at 2% interest for 3 years
C)the present value of $250 to be paid in two years when the interest rate is 3%
D)the present value of $250 to be paid in three years when the interest rate is 2%

Accepted Answer

The answer of Which of the following is the largest?
A)the...

Question 9

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

Accepted Answer

The answer of Twenty years ago, Dr. Montgomery borrowed money...

Question 10

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?
A)about 6.3 years
B)about 7 years
C)about 7.7 years
D)about 10 years

Accepted Answer

The answer of According to the rule of 70, if...

Question 11

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?
A)5 percent
B)7 percent
C)10 percent
D)14 percent

Accepted Answer

The rule of 70 is a shortcut to estimate the number of years it takes for an investment to double in value. It is calculated by dividing 70 by the annual rate of return. In this case, since William's money has quadrupled, we can estimate that it took approximately two doubling periods. Therefore, 70/2 = 35. This means that Alfred earned an average annual rate of return of 35%. However, since the answer choices are given in whole numbers, the closest option is 10%, which is the correct answer.

Question 12

The concept of present value helps explain why
A)investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
B)investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases.
C)the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases.
D)None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

The concept of present value is used to explain why investment decreases when the interest rate increases (because the higher interest rate increases the present value of future returns and makes investment less attractive) and also why the quantity of loanable funds demanded decreases when the interest rate increases (because the higher interest rate increases the present value of the cost of borrowing and reduces the quantity of loanable funds demanded).

Question 13

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?
A)$210
B)$300
C)$800
D)$1,010

Accepted Answer

The rule of 70 is a way to estimate the number of years it takes for an investment to double in value at a given annual rate of return by dividing 70 by the interest rate. With a 10 percent interest rate, it takes about 7 years for the investment to double (70/10 = 7). In 21 years, the investment doubles 3 times (21/7 = 3). Starting with $100, after the first 7 years it doubles to $200, after 14 years it doubles again to $400, and after 21 years it doubles once more to $800.

Question 14

The future value of $500 saved for two years at an interest rate of 5% is
A)$550.25.
B)$550.00.
C)$551.25.
D)None of the above are correct.

Accepted Answer

Using the formula for future value (FV):
FV = PV x (1 + r)^n
where PV is the present value, r is the interest rate, and n is the number of periods.
Plugging in the values, we get:
FV = 500 x (1 + 0.05)^2
FV = 500 x 1.1025
FV = 551.25
Therefore, the future value of $500 saved for two years at an interest rate of 5% is $551.25.

Question 15

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied
A)rise, and investment spending rise.
B)rise, and investment spending fall.
C)fall, and investment spending rise.
D)fall, and investment spending fall.

Accepted Answer

An increase in the interest rate would increase the return on savings, making it more attractive for individuals and financial institutions to save. As a result, the quantity of loanable funds supplied would rise (as people are more willing to save their money). However, with higher interest rates, borrowing to finance investments becomes more expensive. This means that businesses are less likely to invest in long-term projects, causing the quantity of loanable funds demanded to fall. Therefore, investment spending would fall alongside the rise in supplied loanable funds.

Question 16

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?
A)$400
B)$800
C)$1,600
D)$3,200

Accepted Answer

The answer of Using the rule of 70, about how...

Question 17

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year A)doubles every 70/X years. B)doubles every 70(1 - 1/X) years. C)doubles every 70/X² years. D)doubles every 70/(1 - X) years.

Accepted Answer

The rule of 70 states that to find the approximate number of years it takes for a variable to double, you divide 70 by the annual growth rate (expressed as a percentage). Therefore, choice A correctly states that a variable with a growth rate of X percent per year doubles every 70/X years.

Question 18

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?
A)about 3.5 years
B)about 6.3 years
C)about 12 years
D)about 14 years

Accepted Answer

The answer of According to the rule of 70, if...

Question 19

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?
A)deadweight loss
B)present value
C)economic growth
D)financial intermediation

Accepted Answer

When interest rates fall, the present value of future returns on investment increases, making investment more attractive. This is because a lower discount rate (i.e. interest rate) leads to a higher present value of future cash flows. Therefore, option B, present value, is the most helpful concept in explaining why investment increases when interest rates fall.

Question 20

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years? A)$2,000(1.06) B)$1,000 + $(1.06)² C)$1,000(1.06)² D)None of the above are correct.

Accepted Answer

To find the value of $1,000 after two years at an interest rate of 6%, we need to multiply the initial amount by (1 + interest rate) raised to the power of the number of years. In this case, that would be $1,000(1.06)^2 = $1,123.60. Therefore, choice C is the correct answer. Choice A is incorrect because it only calculates the value after one year, and does not take into account compounding. Choice B is incorrect because it includes an arbitrary sequence of characters that do not calculate the correct answer. Choice D is incorrect because one of the previous choices must be correct.

Quiz 27: Tools of Finance

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Which of the following is the largest?

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

The concept of present value helps explain why

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

The future value of $500 saved for two years at an interest rate of 5% is

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?