125. A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or
$11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off
paying $11,000 two years from today?
a.
2 percent
b.
3 percent
c.
4 percent
d.
5 percent
126. You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now
instead. For which of the following interest rates and payments would you take the money today?.
a.
8 percent, $15,000
b.
7 percent, $16,000
c.
6 percent, $17,000
d.
All of the above are correct.
127. Which of the following is correct if the interest rate is 6 percent?
a.
b.
c.
d.
128. Other things the same, when the interest rate rises, the present value of future revenues from investment projects
a.
rises, so investment spending rises.
b.
falls, so investment spending rises.
c.
rises, so investment spending falls.
d.
falls, so investment spending falls.
129. Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that
this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case
do these changes both make them less likely to buy the truck?
a.
Interest rates rise and truck prices rise.
b.
Interest rates fall and truck prices rise.
c.
Interest rates rise and truck prices fall.
d.
Interest rates fall and truck prices fall.
130. Ronaldo’s Foods considered building a store in a new location. The owners and their accountants decided that this
was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of
building the store changed. In which case do these changes both make it more likely that they will now build the store?
a.
Interest rates rise and the cost of building the store rises.
b.
Interest rates rise and the cost of building the store falls.
c.
Interest rates fall and the cost of building the store rises.
d.
Interest rates fall and the cost of building the store falls.
131. Black Oil Company considered building a service station in a new location. The owners and their accountants
decided that this was the profitable thing to do. However, soon after they made this decision, both the interest rate and the
cost of building the station changed. In which case do these changes both make it less likely that they will now build the
station?
a.
Interest rates rise and the cost of building the station rises.
b.
Interest rates rise and the cost of building the station falls.
c.
Interest rates fall and the cost of building the station rises.
d.
Interest rates fall and the cost of building the station falls.
132. HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that
this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the
returns from this investment project
a.
is now lower than it was before, and so Hydro Grow is less likely to build the building.
b.
is now lower than it was before, and so HydroGrow is more likely to build the building.
c.
is now higher than it was before, and so HydroGrow is less likely to build the building.
d.
is now higher than it was before, and so HydroGrow is more likely to build the building.
133. Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost
them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the
second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their
revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the
price of a bicycle?
a.
5 percent
b.
6 percent
c.
7 percent
d.
8 percent
134. Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of
$167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?
a.
7%
b.
6%
c.
5%
d.
It is not profitable at any of these interest rates.
135. Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of
$167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this
project profitable?
a.
5 percent
b.
4 percent
c.
3 percent
d.
2 percent
136. The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding
the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing
after that. At which of the following prices and interest rates would K-Nine buy the equipment?
a.
$415,000 if the interest rate is 5%
b.
$419,000 if the interest rate is 4%
c.
K-Nine would buy the equipment in both cases.
d.
K-Nine would not buy the equipment in either case.
137. Sometimes On Time (SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if
there were either
a.
a decrease in the price of a new jet or a decrease in the interest rate.
b.
a decrease in the price of a new jet or an increase in the interest rate.
c.
an increase in the price of a new jet or a decrease in the interest rate.
d.
an increase in the price of a new jet or an increase in the interest rate.
138. A firm has three different investment options, each costing $10 million. Option A will generate $12 million in
revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option C will
generate $18 million in revenue at the end of three years. Which option should the firm choose?
a.
Option A
b.
Option B
c.
Option C
d.
The answer depends on the rate of interest, which is not specified here.
139. A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10
million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the
end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm
$30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?
a.
Option A
b.
Option B
c.
Option C
d.
The answer depends on the rate of interest, which is not specified here.
140. A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10
million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end
of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15
million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will
give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years.
Which of these options has the highest present value if the rate of interest is 5 percent?
a.
Option A
b.
Option B
c.
Option C
d.
Option D
141. Allen Steel Company is considering whether to build a new mill. If the interest rate rises,
a.
the present value of the returns from the mill will fall, so Allen will be less likely to build the mill.
b.
the present value of the returns from the mill will fall, so Allen will be more likely to build the mill.
c.
the present value of the returns from the mill will rise, so Allen will be less likely to build the mill.
d.
the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.
142. A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one
gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year
from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which
of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?
a.
7 percent
b.
8 percent
c.
9 percent
d.
10 percent
143. A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is
to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three
years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the
highest?
a.
The first is lowest; the second is highest.
b.
The second is lowest; the third is highest.
c.
The third is lowest; the fourth is highest.
d.
The fourth is lowest; the first is highest.
144. The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and
board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting
a.
the present value of the factory rises. It’s more likely the company will build the factory.
b.
the present value of the factory rises. It’s less likely the company will build the factory.
c.
the present value of the factory falls. It’s more likely the company will build the factory.
d.
the present value of the factory falls. It’s less likely the company will build the factory.
145. Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will
generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate
at which Markovich still would be willing to build the plant?
a.
3 percent
b.
3.5 percent
c.
4 percent
d.
4.5 percent
146. Yoyo’s Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of
additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional
revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay
a.
$140,000, but not $150,000.
b.
$150,000, but not $160,000.
c.
$160,000, but not $170,000.
d.
$170,000, but not $180,000.
147. The concept of present value helps explain why
a.
b.
c.
d.
148. Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?
a.
deadweight loss
b.
present value
c.
economic growth
d.
financial intermediation
149. Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded
a.
rise, and investment spending rise.
b.
rise, and investment spending fall.
c.
fall, and investment spending rise.
d.
fall, and investment spending fall.
150. Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied
a.
rise, and investment spending rise.
b.
rise, and investment spending fall.
c.
fall, and investment spending rise.
d.
fall, and investment spending fall.
151. Which of the following is the largest?
a.
the future value of $250 with 3% interest for 2 years
b.
the future value of $250 at 2% interest for 3 years
c.
the present value of $250 to be paid in two years when the interest rate is 3%
d.
the present value of $250 to be paid in three years when the interest rate is 2%
152. If the interest rate is r percent, then the rule of 70 says that your savings will double about every
a.
70/(1 – r) years.
b.
70/(1 + r) years.
c.
70/r years.
d.
70(1 + r)/r years.
153. Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5
percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?
a.
$12,000
b.
$14,000
c.
$15,500
d.
$20,000
154. The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year
a.
doubles every 70/X years.
b.
doubles every 70(1 – 1/X) years.
c.
doubles every 70/X2 years.
d.
doubles every 70/(1 – X) years.
155. According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings
account to double?
a.
about 6.3 years
b.
about 7 years
c.
about 7.7 years
d.
about 10 years
156. According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to
double?
a.
about 3.5 years
b.
about 6.3 years
c.
about 12 years
d.
about 14 years
157. Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does
she have at the end of 21 years?
a.
$210
b.
$300
c.
$800
d.
$1,010
158. Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate
of interest would she need to earn to attain her objective?
a.
5 percent
b.
7 percent
c.
10 percent
d.
14 percent
159. Twenty years ago, Dr. Montgomery borrowed money from her parents to pay her tuition at graduate school. Now she
wants to pay them back. She gives them double what they gave her. According to the rule of 70, what interest rate would
have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?
a.
3.5 percent
b.
4.5 percent
c.
5 percent
d.
7 percent
160. Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account
and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?
a.
5 percent
b.
7 percent
c.
10 percent
d.
14 percent
161. You are tearing down a building and find $1 in change that someone lost when working on the building 140 years
ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent
interest every year for 140 years, how much would be in the account today according to the rule of 70?
a.
$4
b.
$8
c.
$16
d.
$32
162. Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?
a.
$400
b.
$800
c.
$1,600
d.
$3,200
163. According to the rule of 70, if a person’s saving doubles in 10 years, what interest rate were they earning?
a.
3.5
b.
7
c.
14
d.
None of the above is correct.
164. Will is risk averse and has $1,000 with which to make a financial investment. He has three options. Option A is a
risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts
expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in
four years. Will should choose
a.
b.
c.
d.
165. If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?
a.
$2,000(1.06)
b.
$1,000 + $(1.06)2
c.
$1,000(1.06)2
d.
None of the above are correct.
166. The future value of $500 saved for two years at an interest rate of 5% is
a.
$550.25.
b.
$550.00.
c.
$551.25.
d.
None of the above are correct.
167. If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the
two years?
a.
$972.00
b.
$973.44
c.
$974.19
d.
None of the above is correct.
168. Which of the following has the highest future value?
a.
$100 saved for 2 years at 10 percent interest
b.
$110 saved for 2 years at 9 percent interest
c.
$120 saved for 2 years at 8 percent interest
d.
$130 saved for 2 years at 7 percent interest
169. On the Internet you find the following offers for opening an online account. Which of them is the best offer if you
have $2,000 to save for two years?
a.
b.
c.
d.
170. On the Internet you find the following offers for opening an online account. Which of them is the best offer if you
have $5,000 to save for two years?
a.
b.
c.
d.
171. What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?
a.
$2,000/1.06
b.
$1000/(1.06)2
c.
$1000/(1 + 0.062)
d.
None of the above are correct.
172. What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?
a.
$2205
b.
$2200
c.
$1818.18