## Quiz 14 :

Investment, Time, and Insurance

Question Type

All

Suppose that a bond with a $1,000 face value matures in one year and pays a 10% coupon rate. It is selling for $1,025. What interest rate would make a person indifferent between the selling price of $1,025 and the bond payment (face value and coupon) one year from now?

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Answer:

B

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A change in household tastes and preferences reduces the rate of saving. The market interest rate _____, and the quantity of capital _____.

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Multiple Choice

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Answer:

B

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Tom is considering an investment that gives a $400 payout in one year and a $600 payout in two years. If interest rates are 6%, the maximum price that Tom should pay for this investment is $____.

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Multiple Choice

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Answer:

B

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(Table: Car Costs) The table shows the initial cost outlays of two versions of the Ford Escape and their estimated annual fuel costs. Stu is not sure whether he wants the hybrid or standard model. Although more expensive, the hybrid model has better gas mileage and would save $890 of gas per year. Assume both cars are worthless after six years. At a 7% interest rate, what should Stu do?

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A corporate bond has a $10,000 face value and offers a 7% coupon rate. The bond matures at the end of three years. If the interest rate is 5%, the present discounted value of the bond is $____.

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A corporate bond has a $10,000 face value and offers a 7% coupon rate. The bond matures at the end of three years. If the interest rate is 7%, the present discounted value of the bond is $____.

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Liqin fixes up old cars and sells them to supplement his retirement income. Liqin came across a beat-up 1955 Corvette that she is considering rebuilding and selling. She estimates a 0.2 probability that she will gain 15% on the deal, a 0.2 probability that she will gain 10%, and a 0.6 probability that she will gain 5%. Liqin's expected return for fixing up and selling the Corvette is ____%.

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Daiyu's parents have decided to save for her college education. They estimate they will need $100,000 18 years from now to pay for it. If the interest rate remains fixed at 5% over this period, how much money will Daiyu's parents have to put into savings today to meet their goal (assuming no more money is saved over the years)?

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Assume a future payment of $10,000. If r = 0.2 and T = 5, then the present value of $10,000 is $____.

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(Figure: Utility and Income) Suppose that Sara has an income of $80,000 but if her business burns down, her income drops to $20,000. The probability that Sara's business will burn down is ____%.

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(Table: Investments I) The table depicts the costs and benefits of an investment. Which of the following statements is (are) TRUE? I. If the interest rate is 8%, the investment is worthwhile.
II) If the interest rate is 6%, the investment's net present value is $79.26.
III) If the interest rate is 4%, the investment is worthwhile.

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If principal is invested at a constant interest rate, the value of the account will increase:

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(Table: Account Balance) Using an interest rate of 10%, the value of the savings account balance in year 10 is $____.

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(Table: Utility Function II) Suppose the person's utility function is given by U = I

^{0.5}, where I is income. What guaranteed income level would offer the same expected utility level as that from the uncertain income (i.e., find the certainty equivalent)? Multiple Choice

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The market for capital is in equilibrium at an interest rate of 3% and a quantity of $10 million. Suppose that businesses become more optimistic about future demand and start to invest heavily in capital. This would cause the equilibrium interest rate to ____ and the equilibrium quantity of capital to ____.

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(Table: Payback Period) If management uses the net present value method and requires a two-year period to reach the payback period, then management will ____ the investment because the total benefits over the first two years are ____.

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The market for capital is in equilibrium at an interest rate of 3% and a quantity of $10 million. Suppose that households become more frugal and decide to spend less and save more. This would cause the equilibrium interest rate to ____ and the equilibrium quantity of capital to ____.

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A firm is considering an investment project that today would cost $20,000. At the end of one year, there is a 70% probability that the investment will pay out $28,000 and a 30% probability that it will pay out $16,000. Using a 10% interest rate, what is the expected net present value of this investment?

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