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d.
$1814.06
173. You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If
the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?
a.
$500(1.05)2 + $500/(1.05)2
b.
$500(1.05)2 + $500
c.
$500 + $500/(1.05)2
d.
$500 + $500
174. Albert Einstein once referred to compounding as
a.
“an obsession among economists that defies explanation.”
b.
“the greatest mathematical discovery of all time.”
c.
his own discovery.
d.
John Maynard Keynes’s greatest contribution.
175. Which famous person referred to compounding as “the greatest mathematical discovery of all time?”
a.
Abraham Lincoln
b.
Thomas Edison
c.
Benjamin Franklin
d.
Albert Einstein
176. In answering which of the following questions would you find it necessary to calculate a present value?
a.
Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest?
b.
Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the
corporation $3 million after 5 years?
c.
If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the
account after 2 years?
d.
You would find it necessary to calculate a present value in order to answer all of these questions.
177. In answering which of the following questions would you find it necessary to calculate a future value?
a.
If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the
account after 2 years?
b.
Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the
corporation $3 million after 5 years?
c.
As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose
annual payments of $30,000 for each of the next 10 years?
d.
You would find it necessary to calculate a future value in order to answer all of these questions.
178. You deposit $3,000 into an N–year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N
years you have $4,082.59. What is the number of years, N?
a.
4
b.
5
c.
6
d.
7
179. You deposit X dollars into a 3–year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3
years you have $4,229.70. What number of dollars, X, did you deposit?
a.
$3,680.00
b.
$3,712.77
c.
$3,750.00
d.
$3,772.57
180. You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year
from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600
one year from today. Which of the following statements is correct?
a.
The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B.
b.
The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B.
c.
The interest rates on the two loans are the same.
d.
There is not enough information to determine which loan has the higher interest rate.
181. You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,154 one year
from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B
$2,477.10 one year from today. In order for the same interest rate to apply to the two loans, X =
a.
$2,300.00.
b.
$2,450.00.
c.
$2,500.00.
d.
$2,525.50.
182. You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,125 one year
from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B
$2,200 two years from today. In order for the same interest rate to apply to the two loans, X =
a.
$1,853.55.
b.
$1,898.70.
c.
$1,948.79.
d.
$2,012.22.
183. Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment
of $5,000 or (2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now,
and the second payment coming two years from now. You would choose to take the two annual payments if the interest
rate is
a.
2 percent, but not if the interest rate is 3 percent.
b.
3 percent, but not if the interest rate is 4 percent.
c.
4 percent, but not if the interest rate is 5 percent.
d.
5 percent, but not if the interest rate is 6 percent.
184. Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment
of $10,000 or (2) two annual payments, each in the amount of $5,200, with the first payment coming one year from now,
and the second payment coming two years from now. You would choose to take the immediate payment of $10,000 if the
interest rate is
a.
2 percent, but not if the interest rate is 1 percent.
b.
3 percent, but not if the interest rate is 2 percent.
c.
4 percent, but not if the interest rate is 3 percent.
d.
5 percent, but not if the interest rate is 4 percent.
185. If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account
at the end of the six years?
a.
b.
c.
d.
186. Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future
payment is
a.
$725.62. It would be higher if the interest rate were higher.
b.
$727.28. It would be higher if the interest rate were higher.
c.
$725.62. It would be lower if the interest rate were higher.
d.
$727.28. It would be lower if the interest rate were higher.
187. The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the
amount that will be paid in three years?
a.
$1,150.00
b.
$1,157.63
c.
$1,215.51
d.
$1,250.00
188. A company that produces baseball gloves is considering buying some new equipment that it expects will increase
future profits. If the interest rate rises, then the present value of these future profits
a.
rises. The company is more likely to buy the equipment.
b.
rises. The company is less likely to buy the equipment.
c.
falls. The company is more likely to buy the equipment.
d.
falls. The company is less likely to buy the equipment.
189. A company that produces wallpaper is considering buying some new equipment that it expects will increase future
profits. If the interest rate falls, then the present value of these future earnings
a.
rises. The company is more likely to buy the equipment.
b.
rises. The company is less likely to buy the equipment.
c.
falls. The company is more likely to buy the equipment.
d.
falls. The company is less likely to buy the equipment.
190. Greg’s Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company
accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first
year, $4 million the second year and have no value thereafter. Greg’s Tasty Ice Cream should build the factory if the
interest rate is
a.
3% but not if it is 4%.
b.
4% but not if it is 5%.
c.
5% but not if it is 6%.
d.
6% but not if it is 7%.
191. You are better off choosing $100 today rather than $200 in 9 years if the interest rate is
a.
lower than about 8 percent.
b.
higher than about 8 percent.
c.
lower than about 10 percent.
d.
higher than about 10 percent.
192. You are better off choosing $400 in 4 years rather than $300 today if the interest rate is
a.
lower than about 5.5 percent.
b.
higher than about 5.5 percent.
c.
lower than about 7.5 percent.
d.
higher than about 7.5 percent.
193. Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The
future value of the $500 in 5 years to the nearest cent is
a.
$575.00
b.
$578.81
c.
$579.64
d.
None of the above is correct.
194. If the interest rate is 4%, in which of the following cases is the future value the largest?
a.
An initial value of $1,000 deposited for 5 years.
b.
An initial value of $950 deposited for 6 years.
c.
An initial value of $900 deposited for 7 years.
d.
An initial value of $850 deposited for 8 years.
195. Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more
than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500
saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest
rate of 6 percent.
a.
Both Vince and Terri are correct.
b.
Only Vince is correct.
c.
Only Terri is correct.
d.
Neither Vince nor Terri is correct.
196. You have been promised a payment of $100,000 in the future. In which case is the present value of this future
payment highest?
a.
You receive the payment 2 years from now and the interest rate is 6 percent.
b.
You receive the payment 2 years from now and the interest rate is 4 percent.
c.
You receive the payment 3 years from now and the interest rate is 6 percent.
d.
You receive the payment 3 years from now and the interest rate is 4 percent.
197. Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?
a.
$550 one year from today.
b.
$580 two years from today.
c.
$600 three years from today.
d.
$615 four years from today.
198. La Rossa Pasta Company is considering expanding its factory. In which case would both the change in the cost and
the change in the interest rate each make it less likely that La Rossa’s would expand?
a.
a decrease in the cost of expanding and a decrease in the interest rate.
b.
a decrease in the cost of expanding and an increase in the interest rate.
c.
an increase in the cost of expanding and a decrease in the interest rate.
d.
an increase in the cost of expanding and an increase in the interest rate.
199. A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value
of this bond?
a.
$500(1 + r) + $10,500/(1 + r)2
b.
$500/(1 + r) + $10,500/(1 + r)2
c.
$11,000/(1 + r)2
d.
$500(1 + r) + $10,500(1 + r)2
200. If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?
a.
$4,531.52
b.
$4,878.52
c.
$5,124.50
d.
$5,516.91
201. Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What
is the approximate interest rate paid by the savings bond?
a.
5%
b.
10%
c.
15%
d.
20%
202. If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take
to double your money?
a.
8 years
b.
10 years
c.
12 years
d.
14 years
203. Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the
child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to
the child?
a.
2 times
b.
3 times
c.
4 times
d.
8 times
204. Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X
would you be indifferent between the two options?
a.
X = 809.33
b.
X = 855.56
c.
X = 895.42
d.
X = 916.74
205. Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from
now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?
a.
$51,830.26
b.
$54,464.96
c.
$57,188.21
d.
$58,237.71
206. You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future
value of this $2,000?
a.
$3,494.40
b.
$3,585.85
c.
$3,601.89
d.
$3,676.14
207. Suppose you put $10,000 into a bank account today that pays interest annually at an annual rate of 0.5%. What is the
future value of the $10,000 after 10 years?
a.
$10,050.00
b.
$10,511.40
c.
$10,573.26
d.
$16,288.95
208. Suppose you own a savings bond that will pay you $100 in 7 years. If the annual interest rate is 2%, what is the
present value of the savings bond?
a.
$27.91
b.
$87.06
c.
$93.64
d.
$87.06
209. Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of
$2,750 (with the first payment today). Of the following, which is the lowest annual interest rate at which you would
prefer the lump-sum payment over the four annual payments?
a.
2%
b.
5%
c.
7%
d.
10%
210. Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of
$2,750 (with the first payment today). Of the following, which is the highest annual interest rate at which you would
prefer the four annual payments over the lump-sum payment?
a.
2%
b.
5%
c.
7%
d.
10%
211. Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of
$2,750 (with the first payment one year from today). Of the following, which is the lowest annual interest rate at which
you would prefer the lump-sum payment over the four annual payments?
a.
2%
b.
5%
c.
7%
d.
10%
212. Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of
$2,750 (with the first payment one year from today). Of the following, which is the highest annual interest rate at which
you would prefer the four annual payments over the lump-sum payment?
a.
2%
b.
5%
c.
7%
d.
10%
213. Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and
will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is
correct?
a.
The company should not construct the new facility because the future value of the construction cost is only
$1,628,894.63.
b.
The company should not construct the new facility because the future value of the construction cost is
$1,783,267.42.
c.
The company should construct the new facility because the present value of the future payoff is $1,092,734.95.
d.
The company should construct the new facility because the present value of the future payoff is $1,043,652.53.
214. Suppose your grandfather put $10,000 in the bank in 1965 at an annual interest rate of 7%. Using the Rule of 70,
approximately how large should the bank balance be in 2015?
a.
$50,000
b.
$60,000
c.
$80,000
d.
$320,000
215. You are considering buying a share of stock in Company ABC. At the end of years 1, 2, and 3 the stock will pay you
a dividend of $10. In addition, at the end of the third year you expect to sell the share of stock for $200. If the interest
rate is 5%, how much is the share of ABC stock worth to you today?
a.
$200
b.
$210
c.
$220
d.
$230
216. You are considering buying a share of stock in XYZ Corporation. At the end of years 1, 2, and 3 the stock will pay
you a dividend of $15. In addition, at the end of the third year you expect to sell the share of stock for $100. If the
interest rate is 3%, how much is the share of XYZ stock worth to you today?
a.
$123.14
b.
$133.94
c.
$137.96
d.
$145.00
