Question 1

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 9%.If you expect inflation to be 5% or lower,then you are expecting to earn a real interest rate of at least

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. If the nominal rate is 9% and inflation is expected to be 5% or lower, the real interest rate would be at least 9% - 5% = 4%.

Question 2

If the real interest rate is 5% and the inflation rate is 3% then the real growth rate in your purchasing power is 8%.

Accepted Answer

The real growth rate in purchasing power is actually 2%, because the real interest rate already accounts for inflation.

Question 3

A bond with a $90,000 face value sells at a $10,000 discount one year prior to maturity.What is the nominal interest rate paid by the bond?

Accepted Answer

The answer of A bond with a $90,000 face value...

Question 4

The relative price of a pineapple today in terms of pineapples tomorrow is given by

Accepted Answer

The answer of The relative price of a pineapple today...

Question 5

If a project costs $2000 up front and generates revenues of $500 per year for ten years,then any profit maximizing company will choose to undertake the project.

Accepted Answer

The decision to undertake the project depends on the discount rate or the cost of capital. Without considering the time value of money, it's not possible to determine if the project's net present value (NPV) is positive, which is a key factor in profit-maximizing decisions.

Question 6

When the interest rate is 7.5%,what is the present value of a perpetuity paying $50 a year forever?

Accepted Answer

The present value of a perpetuity is calculated using the formula PV = PMT / i, where PV is the present value, PMT is the annual payment, and i is the interest rate per period. Here, PMT = $50 and i = 7.5% or 0.075. So, PV = $50 / 0.075 = $666.67.

Question 7

A dividend is the amount of money a shareholder is paid (per share)at years end.

Accepted Answer

A dividend is a distribution of profits by a corporation to its shareholders, but it can be issued at various times throughout the year, not just at year's end, and the frequency can vary by company (e.g., quarterly, semi-annually, annually).

Question 8

When a bond is sold at a discount,the term discount refers to

Accepted Answer

When a bond is sold at a discount, it means that the current market price of the bond is less than its face value. Therefore, the discount refers to the face value of the bond minus its current price.

Question 9

Anna and Howard both own 100 shares of Photo-Hut.Anna buys stocks for income for current consumption,Howard buys stocks for their future growth.This year the firm has paid out all its profits to its stockholders.We can expect that

Accepted Answer

Since Anna buys stocks for income for current consumption, she will likely spend the income received from the firm. On the other hand, Howard buys stocks for their future growth, indicating that he is willing to let his investment grow over time. Therefore, Howard is more likely to reinvest the income back into the firm by using the money to buy more stock.

Question 10

A perpetuity is selling for $20,000 when the interest rate is 6%.What must the expected annual payment be?

Accepted Answer

The expected annual payment for a perpetuity can be calculated using the formula: Payment = Price * Interest Rate. Therefore, $20,000 * 0.06 = $1,200.

Question 11

A representative agent is someone that acts as a proxy for an investor during corporate votes.

Accepted Answer

A representative agent in economics refers to a hypothetical individual who represents the average or typical behavior of a larger group, such as consumers or firms, in economic models, not someone who acts as a proxy for an investor during corporate votes.

Question 12

Your artistically talented friend Pablo offers to sell you one of his paintings that he knows you enjoy looking at.You value this enjoyment at $100 and then expect to sell the painting at the end of one year for $500.You would buy the painting when interest rates are at 5% so long as the price he asks for is no greater than

Accepted Answer

To determine the maximum price you would pay for the painting, you need to calculate the present value of the future selling price of $500, discounted at the interest rate of 5% for one year:

PV = FV / (1 + r)
PV = $500 / (1 + 0.05)
PV = $500 / 1.05
PV = $476.19

Next, you need to add your valuation of the enjoyment you will get from the painting:

Maximum Price = PV + Valuation
Maximum Price = $476.19 + $100
Maximum Price = $576.19

Therefore, you should only buy the painting if the price Pablo asks for is no greater than $576.

Question 13

The price of a bond can be expressed as its Face Value minus its Discount.

Accepted Answer

The price of a bond can indeed be expressed as its face value minus its discount if the bond is being sold for less than its face value. This discount reflects the difference between the bond's face value and its current selling price.

Question 14

If marginal costs are significant,then the price of an exhaustible resource grows at the rate of interest.

Accepted Answer

The price of an exhaustible resource grows at the rate of interest when marginal costs are negligible. When marginal costs are significant, they affect the price growth rate, making it not solely dependent on the rate of interest.

Question 15

When the annual interest rate is 7 percent,what is the present value of receiving a payment of $10,000 three years from now?

Accepted Answer

The present value (PV) of receiving a payment in the future can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the annual interest rate (as a decimal), and n is the number of years. Here, FV = $10,000, r = 0.07 (7%), and n = 3. Plugging these values into the formula gives PV = $10,000 / (1 + 0.07)^3 = $10,000 / 1.225043 = $8,162.98.

Question 16

A promise to pay at some time in the future

Accepted Answer

A promise to pay at some time in the future is a form of debt, such as a loan or a bond, where the borrower agrees to pay back the lender at a specified future date. This promise represents the present value of the future payment, taking into account the time value of money and expected interest rates. Therefore, A is the best choice as it accurately describes the nature of this promise. B is incorrect as a bond is a specific type of debt instrument, not a general term for promise to pay. C is incorrect as the interest rate is typically included in the terms of the promise to pay, but it is not the same thing as the promise itself. D is incorrect as a dividend is a payment made to shareholders of a company, not a promise to pay by a borrower.

Question 17

If a bond with face value $100 sells for $75,then we say that the bond is selling for a discount of 25%.

Accepted Answer

A discount of 25% would mean the bond is selling for 75% of its face value, which would be $75 in this case. However, the bond is selling for $75, which is only 75% of the face value $100, but not a discount of 25%. So, the answer is false.

Question 18

Consider a bond with a $100,000 face value that matures in 1 year.If the bond pays a nominal interest rate of 8%,what is the bond's discount?

Accepted Answer

The formula to calculate bond discount is:
Discount = Face Value x (1 - 1/(1 + r)^n) where r is the nominal interest rate and n is the number of years until maturity.
Plugging in the values, we get:
Discount = $100,000 x (1 - 1/(1 + 0.08)^1)
Discount = $7,407
Therefore, the answer is B.

Question 19

The price of a bond with a maturity date one time period into the future is equal to its face value

Accepted Answer

The price of a bond with a maturity date one time period into the future is equal to its face value divided by 1 + r, where r is the interest rate. This formula discounts the face value of the bond to its present value.

Question 20

The higher the interest rate,the higher the price of a bond.

Accepted Answer

The price of a bond and its interest rate are inversely related. When interest rates rise, the price of existing bonds will fall to compensate for the opportunity cost of investing in newer bonds with higher interest rates. Conversely, when interest rates fall, the price of existing bonds will rise as they become more attractive to investors seeking a fixed income.

Quiz 17: Allocating Goods Over Time