Chapter 04 – Future Value, Present Value, and Interest Rates
59. A mortgage, where the monthly payments are the same for the duration of the loan, is an
example of:
A. A variable payment loan
60. An investment carrying a current cost of $120,000 is going to generate $50,000 of revenue
for each of the next three years. To calculate the internal rate of return we need to:
A. Calculate the present value of each of the $50,000 payments and multiply these and set this
equal to $120,000
61. Usually an investment will be profitable if:
A. The internal rate of return is less than the cost of borrowing
Chapter 04 – Future Value, Present Value, and Interest Rates
62. A coupon bond is a bond that:
D. Pays a variable coupon rate depending on the bond’s price
63. The coupon rate for a coupon bond is equal to:
D. The annual coupon payment divided by the selling price of the bond
64. If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will
receive annual coupon payments of:
A. $425.00
Chapter 04 – Future Value, Present Value, and Interest Rates
65. If a bond has a face value of $1,000 and the bondholder receives coupon payments of
$27.50 semi-annually, the bond’s coupon rate is:
D. A value that cannot be determined from the information provided
66. Consider a bond that costs $1000 today and promises a one-time future payment of $1080
in four years. What is the approximate interest rate on this bond?
D. 10.8%
67. Which of the following is necessarily true of coupon bonds?
A. The price exceeds the face value
Chapter 04 – Future Value, Present Value, and Interest Rates
68. The price of a coupon bond will increase as:
A. The face value decreases
69. Suppose the nominal interest rate on a one-year car loan is 8% and the inflation rate is
D. The ex post real interest rate 11%
70. Interest rates that are adjusted for expected inflation are known as:
D. Nominal interest rates
Chapter 04 – Future Value, Present Value, and Interest Rates
71. The price of a coupon bond is determined by:
A. Taking the present value of the bond’s final payment and subtracting the coupon payments
72. The price of a coupon bond is determined by:
A. Taking the present value of the bond’s final payment and subtracting the coupon payments
73. Compounding refers to:
Chapter 04 – Future Value, Present Value, and Interest Rates
74. The interest rate used to discount the promised payment from a bond:
A. Will vary directly with the value of the bond
75. A credit card that charges a monthly interest rate of 1.5% has an effective annual interest
rate of:
D. 17.50%
76. Which formula below best expresses the real interest rate, (r)?
A. i = r – e
Chapter 04 – Future Value, Present Value, and Interest Rates
77. A borrower who makes a $1000 loan for one year and earns interest in the amount of $75,
earns what nominal interest rate and what real interest rate if inflation is two percent?
A. A nominal rate of 5.5% and a real rate of 2.0%
78. As inflation increases, for any fixed nominal interest rate, the real interest rate:
A. Also increases
79. Considering the data on real and nominal interest rates for the U.S. from 1979 to 2006,
which of the following statements is most accurate?
D. The inflation rate is always greater than the real interest rate
Chapter 04 – Future Value, Present Value, and Interest Rates
80. Which of the following statements is most correct?
D. None of the above statements is correct
81. From the Fisher equation we see that the nominal interest rate and expected inflation
have:
A. An inverse relationship
82. High rates of inflation are usually associated with:
D. High nominal interest rates and negative real rates
Chapter 04 – Future Value, Present Value, and Interest Rates
83. If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she
should charge a nominal interest rate that:
A. Is at least 7%
84. A borrower is offered a choice between a fixed rate mortgage and a variable rate
D. The home price to decrease
85. A borrower is offered a choice between a fixed rate mortgage and a variable rate
mortgage. The variable rate mortgage may be more attractive to the lender if the lender
expects:
A. Inflation to decrease
Chapter 04 – Future Value, Present Value, and Interest Rates
D. Volatile real interest rates
Short Answer Questions
87. A lender expects to earn a real interest rate of 4.5% over the next 12 months. She charges
a 9.25% (annual) nominal rate for a 12-month loan. What inflation rate is she expecting? If
the lender is in a 30% marginal tax bracket and the borrower is in a 25% marginal tax bracket,
what are the real after-tax rates each expects?
88. Compute the interest rate for a $1,000 face value a bond that sells for $280 and matures in
20 years. The bond has no coupon payments, only the face value payment.
Chapter 04 – Future Value, Present Value, and Interest Rates
89. Compute the future value of $1,000 at a 6 percent interest rate after three different lengths
of time. Use 6, 10 and 20 years into the future.
90. Considering the concept of compounding, explain why in determining the future value of
a $100 investment at 5 percent annual interest, you can’t simply multiply $100 by (1.10) and
get the correct answer.
91. Calculate which has a higher present value: an annual payment of $100 received over 3
years or an annual payment of $50 received over 7 years. In both cases the interest rate is 7%
(or 0.07).
Chapter 04 – Future Value, Present Value, and Interest Rates
92. What is the monthly interest rate if you are asked to convert a 12 percent annual rate to a
monthly rate (calculate to 4 decimal places)?
93. Convert each of the following basis points amounts to percents:
a) 412.5
b) 10
c) 125.7
d) 1075
e) 1
Chapter 04 – Future Value, Present Value, and Interest Rates
94. Using the rule of 72, determine the approximate time it will take $1000 to double given
the following interest rates.
a) 5.5%
b) 10.0%
c) 30.0%
d) 2.0%
e) 4.5%
95. What will be the amount owed at the end of one year if a borrower charges $100 on
his/her credit card and doesn’t make any payments during the year (assume the interest rate is
1.5% per month)?
Chapter 04 – Future Value, Present Value, and Interest Rates
96. Which investment plan will provide the highest future value: $500 invested at 5 percent
annually for four years and then that balance invested at 7 percent annually for an additional
three years, or $500 invested at 6 percent annually for seven years?