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37-81
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D. making new additions to the capital stock.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Remember
D i f fi c u l t y : 01 Easy
Learning Objective: 37-01 Define financial economics and distinguish between economic
investment and financial investment.
Test Bank: II
Topi c : Financial Investment
194.
Which one of the following is an example of an economic investment?
195.
Which one of the following is an example of a financial investment but not an economic
investment?
196.
Time value of money refers to the idea that a specific amount of money
197.
Which of the following would be the best brief definition of present value?
198.
Compound interest describes increases in value when interest is paid, or compounded, on
37-83
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
used to calculate the present value of any future amount of money.
Test Bank: II
Topi c : Present Value
199.
If an amount $AAA today earns interest at a rate of i percent per year, then the accumulated
amount at the end of n years will be
200.
A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no
repayment is made during the period, after two years the borrower will owe
201.
You deposit $5,000 in a 5-year bank CD that pays 3 percent interest per year. How much
will you get from this deposit at maturity?
37-84
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written consent of McGraw-Hill Education.
D. $6,500
202.
A manufacturing firm takes out a $500,000 loan to expand its plant. The loan has an annual
interest rate of 7 percent. What would be the total compounded interest on the loan at the end of
five years, excluding the principal?
203.
A bank account pays 4 percent interest per year. If you deposit $1,000 into this account at
the start of each year for three years, how much will your account balance be at the end of three
years?
37-85
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: II
Topi c : Present Value
204.
Other factors constant, the future value will be smaller,
205.
A promised amount $FV n years into the future is worth how much today, if the interest rate
is i percent per year?
206.
A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future
(face) value of $200. If the bond were sold today, what would be the present value of the bond?
37-86
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Diff iculty: 02 Medium
Learning Objective: 37-02 Explain the time value of money and how compound interest can be
used to calculate the present value of any future amount of money.
Test Bank: II
Topi c : Present Value
207.
Other factors constant, the present value will be larger,
208.
The correct formula that relates present value (PV) to future value (FV), if interest rate is i
percent per year over n years is
209.
The present value model of investment states that an asset's current price should be equal to
the
210.
A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price
today that is equal to the
211.
A bond that pays no annual interest (or coupons) and has a face value at maturity will fetch
a price today that is equal to the
37-88
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 37-02 Explain the time value of money and how compound interest can be
used to calculate the present value of any future amount of money.
Test Bank: II
Topi c : Present Value
212.
You would like to have $50,000 for a new car in six years. If you deposit money today in a
bank CD that pays 4 percent per year, how much must your deposit be?
213.
You estimate that a piece of real estate for investment will be worth $700,000 in five years.
The current interest rate is 3 percent. What is the present value of this investment?
214.
Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new
portable music player next year. The current market interest rate is 5 percent. What is the present
value of this promotional budget?
37-89
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written consent of McGraw-Hill Education.
B. $185,123
C. $190,476
D. $200,000
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Diff iculty: 02 Medium
Learning Objective: 37-02 Explain the time value of money and how compound interest can be
used to calculate the present value of any future amount of money.
Test Bank: II
Topi c : Present Value
215.
Tracy won a $100 million jackpot. She can receive the jackpot as a $5 million payment
each year for 20 years, or she can ask to receive the present value of all those payments all at
once now. Assume an annual interest rate of 5 percent. If she decides to take the present value
payment, about how much
will she receive?
216.
Xavier is a baseball player negotiating a contract to play for a team for one year. He is
usually paid $10 million a year for playing, but the salary cap for his team means that he will
have to be paid $5 million this year and the remainder next year. If the interest rate is 8 percent,
how much should that
remaining amount be next year?
37-90
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
Diff iculty: 02 Medium
Learning Objective: 37-02 Explain the time value of money and how compound interest can be
used to calculate the present value of any future amount of money.
Test Bank: II
Topi c : Present Value
217.
Matt, a star basketball player, is looking to join a new NBA team. The Bulls are offering
him $24 million for one year. The Heat is offering him $10 million this year and $7.0 million in
each of the next two years. The market interest rate is 5 percent. What is the present value of the
offer from The Heat
in millions (rounded to the nearest one hundred thousand dollars)?
218.
Kick is looking to play for a U.S. MLS team. D.C. United is offering him $50 million for
his first year. The Chicago Fire is offering him $25 million his first year and $10 million per
year for the following three years. The market interest rate is 5 percent. Which offer is the better
deal in terms of present
value in millions?
37-91
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 37-02 Explain the time value of money and how compound interest can be
used to calculate the present value of any future amount of money.
Test Bank: II
Topi c : Present Value
219.
Roger has the opportunity to invest $100,000 in two different assets. The investment in
Asset #1 will have a present value of $120,000. The investment in Asset #2 is expected to have
a future value of $140,000 in four years. If the market interest rate is 5 percent a year, which one
would be the better
investment?
220.
Joe and Linda have the opportunity to purchase a new home. The house in Glen Oaks is
currently worth $250,000 but is predicted to be worth $270,000 in a year. What is the rate of
appreciation for the house from one year to the next?
221.
Which one of the following is a feature of all investments?
37-92
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A.
They provide regular interest payments.
B.
They are typically long term.
C.
They have minimal risk for future payments to be made.
D. They give owners a chance to receive future payments.
222.
Which one of the following is a feature of all investments?
223.
Which of the following is a popular type of investment?
37-93
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topi c : Some Popular Investments
224.
What do stocks represent?
225.
What do bonds represent?
226.
Which of the following statements about stocks and bonds is true?
37-94
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Remember
D i f f i c u l t y : 01 Easy
Learning Objective: 37-03 Identify and distinguish between the most common financial
investments: stocks, bonds, and mutual funds.
Test Bank: II
Topi c : Some Popular Investments
227.
A stock investor may expect returns in the form of
228.
The limited liability rule means that if a corporation goes bankrupt,
229.
Bankruptcy of a firm means that it
37-95
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written consent of McGraw-Hill Education.
D. is unable to make timely promised payments on its debt.
230.
If stockholders sell their shares for more than they paid for those shares, the stockholders
231.
Equal shares of a firm's profit are paid out to stockholders as
232.
The primary risk that bondholders face is that
233.
Which of the following statements is true about investing in stocks and bonds?
234.
The U.S. federal government is unlikely to default on its bonds because
37-97
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: II
Topi c : Some Popular Investments
235.
Which one of the following would best describe a mutual fund?
236.
A mutual fund company uses the funds of its investors to
237.
Investments that are designed to match exactly the performance of a group of stocks like the
Dow Jones Industrial Average or the S&P 500 are called
37-98
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Remember
D i f f i c u l t y : 01 Easy
Learning Objective: 37-03 Identify and distinguish between the most common financial
investments: stocks, bonds, and mutual funds.
Test Bank: II
Topi c : Some Popular Investments
238.
Which of the following statements is true?
239.
An index fund
240.
The rise of mutual funds has radically changed the way corporations are controlled in that
37-99
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written consent of McGraw-Hill Education.
B.
mutual funds increased the percentage of corporate shares owned by individual investors.
C.
corporate ownership became restricted to a select few.
D.
it reduced the share of private ownership and increased the share of public (government)
ownership.
241.
Mutual fund managers tend to focus solely on the
242.
One fundamental concept in financial economics is that an investment's rate of return is
37-100
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written consent of McGraw-Hill Education.
Test Bank: II
Topi c : Calculating Investment Returns
243.
A bond that is currently selling at $1,000 offers to pay $50 annually. What is the percentage
rate of return on the bond?
244.
Terri buys a house for $200,000 and expects to sell it in three years for $300,000. Her
expected percentage rate of return over that three-year period is
245.
Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate
of return on the table is
