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The Basic Tools of Finance
Multiple Choice – Section 00: Introduction
1. Most financial decisions involve two related elements:
a. advice and consent.
b. investment and taxes.
c. time and risk.
d. saving and consumption.
2. The field of finance primarily studies
a. how society manages its scarce resources.
b. the implications of time and risk for allocating resources over time.
c. firms’ decisions concerning how much to produce and what price to charge.
d. how society can reduce market risk.
6542 The Basic Tools of Finance
3. The financial system
a. involves bank accounts, mortgages, stock prices, and many other items.
b. involves decisions and actions undertaken by people at a point in time that affect their
lives in the future.
c. coordinates the economy’s saving and investment.
d. All of the above are correct.
4. Which of the following statements best describes the economist’s view of finance and the
financial system?
a. The financial system is very important to the functioning of the economy, and the tools
of finance are often helpful to us as individuals when we find ourselves making certain
decisions.
b. The financial system, while interesting, is not very important to the functioning of the
economy; however, the tools of finance are often helpful to us as individuals when we
find ourselves making certain decisions.
c. The financial system is very important to the functioning of the economy; however, the
tools of finance are not particularly helpful to us as individuals since we seldom make
decisions for which those tools are useful.
d. The field of finance is intimately concerned with the financial system and the tools of
finance, and financial economists see great importance in them; however, the
“mainstream” economist sees little value in studying financial markets or the tools of
finance.
The Basic Tools of Finance 6543
Multiple Choice – Section 01: Present Value: Measuring the Time Value of Money
1. Suppose you put $500 into a bank account today. Interest is paid annually and the annual
interest rate is 3 percent. The future value of the $500 after 1 year is
a. $485.44.
b. $496.50.
c. $509.28.
d. $515.00.
2. Suppose you put $500 into a bank account today. Interest is paid annually and the annual
interest rate is 8 percent. The future value of the $500 after 2 years is
a. $428.67.
b. $470.00.
c. $580.00. 1.
d. $583.20.
6544 The Basic Tools of Finance
3. Suppose you put $350 into a bank account today. Interest is paid annually and the annual
interest rate is 6 percent. The future value of the $350 after 4 years is
a. $414.09.
b. $434.00.
c. $441.87.
d. $481.24.
4. Suppose you put $500 into a bank account today. Interest is paid annually and the annual
interest rate is 5.5 percent. The future value of the $500 is
a. $637.50 after 5 years and $822.09 after 10 years.
b. $637.50 after 5 years and $775.00 after 10 years.
c. $653.48 after 5 years and $854.07 after 10 years.
d. $688.36 after 5 years and $915.56 after 10 years.
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5. If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in
6 years?
a. $2,420.68
b. $2,591.85
c. $2,996.33
d. $3,040.63
6. Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5
percent, then the present value of the $500 is
a. $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received
in 10 years.
b. $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received
in 10 years.
c. $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received
in 10 years.
d. $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received
in 10 years.
6546 The Basic Tools of Finance
7. Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take
the $100 today if the interest rate is
a. 4 percent.
b. 6 percent.
c. 8 percent.
d. All of the above are correct.
8. Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take
the $100 today if the interest rate is
a. 3 percent.
b. 4 percent.
c. 5 percent.
d. None of the above is correct.
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9. If the interest rate is 4 percent, then you would be equally happy if you received a gift of
either $100 today or a gift of
a. $110.00 two years from today.
b. $112.49 three years from today.
c. $116.00 four years from today.
d. $123.67 five years from today.
10. Suppose the interest rate is 10 percent. Which of the following payments has the largest
present value?
a. You receive $90.91 two years from today.
b. You receive $82.64 one year from today.
c. You receive $75.13 today.
d. All of these payments have the same present value to the nearest cent.
6548 The Basic Tools of Finance
11. Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the
$1,500 in 5 years if the interest rate is
a. 8 percent.
b. 9 percent.
c. 10 percent.
d. All of the above are correct.
12. Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4
percent, then you would prefer to take the $X today if and only if
a. X > 1,055.56.
b. X > 1,120.89.
c. X > 1,232.89.
d. X > 1,338.26.
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13. James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then
you would prefer to take the $1,000 today if and only if a. X < 1,045.00.
b. X < 1,188.89.
c. X < 1,266.67.
d. X < 1,360.86.
14. In which of the following instances is the present value of the future payment the largest?
a. You will receive $1,000 in 5 years and the annual interest rate is 5 percent.
b. You will receive $1,000 in 10 years and the annual interest rate is 3 percent.
c. You will receive $2,000 in 10 years and the annual interest rate is 10 percent.
d. You will receive $2,400 in 15 years and the annual interest rate is 8 percent.
6550 The Basic Tools of Finance
15. Compounding refers directly to
a. finding the present value of a future sum of money.
b. finding the future value of a present sum of money.
c. changes in the interest rate over time on a bank account or a similar savings vehicle.
d. interest being earned on previously-earned interest.
16. Discounting refers directly to
a. finding the present value of a future sum of money.
b. finding the future value of a present sum of money.
c. calculations that ignore the phenomenon of compounding for the sake of ease and
simplicity.
d. decreases in interest rates over time, while compounding refers to increases in interest
rates over time.
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17. One way to characterize the difference between compounding and discounting is to say
that
a. compounding involves the assumption that the interest rate is zero, whereas discounting
does not involve that assumption.
b. discounting involves the assumption that the interest rate is zero, whereas compounding
does not involve that assumption.
c. the process of compounding produces a future value, whereas the process of
discounting produces a present value.
d. the process of compounding produces a present value, whereas the process of
discounting produces a future value.
18. Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold
it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is
6 percent, you will buy the bond if its price today is no greater than
a. $8,225.06.
b. $7,920.94.
c. $7,672.58.
d. $6,998.98.
6552 The Basic Tools of Finance
19. Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you
buy the bond and hold it for 5 years, then at that time you will receive a payment of
$10,000. You will buy the bond today if the interest rate is
a. no less than 9.48 percent.
b. no greater than 9.48 percent.
c. no less than 10.83 percent.
d. no greater than 10.83 percent.
20. A manufacturing company is thinking about building a new factory. The factory, if built,
will yield the company $300 million in 7 years, and it would cost $220 million today to
build. The company will decide to build the factory if the interest rate is
a. no less than 4.53 percent.
b. no greater than 4.53 percent.
c. no less than 5.81 percent.
d. no greater than 5.81 percent.
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21. Which of the following is the correct way to compute the future value of $X that earns r
percent interest for N years?
a. $X(1 + rN)N
b. $X(1 + r)N
c. $X(1 + rN)
d. $X(1 + r/N)N
22. Which of the following is the correct way to compute the future value of $1 put into an
account that earns 5 percent interest for 16 years?
a.
$1(1 + .05)16
b.
$1(1 + .05 16) 16
c.
$1(1 + .05 16)
d.
$1(1 + 16/.05)16
6554 The Basic Tools of Finance
23. Which of the following is the correct way to compute the future value of $100 put into
an account that earns 4 percent interest for 10 years?
a. $100(1 + .0410)
b. $100(1 + .04 10)
c. $100 × 10 (1 + .04)
d. $100(1 + .04)10
24. The future value of a deposit in a savings account will be larger
a. the longer a person waits to withdraw the funds.
b. the higher the interest rate is.
c. the larger the initial deposit is.
d. All of the above are correct.
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25. The future value of a deposit in a savings account will be smaller
a. the longer a person waits to withdraw the funds.
b. the lower the interest rate is.
c. the larger the initial deposit is.
d. All of the above are correct.
26. What is the future value of $500 one year from today if the interest rate is 6 percent?
a. $515
b. $520
c. $530
d. None of the above is correct.
6556 The Basic Tools of Finance
27. What is the future value of $750 one year from today if the interest rate is 2.5 percent?
a. $766.50
b. $768.75
c. $770.23
d. None of the above are correct to the nearest cent.
28. What is the future value of $800 one year from today if the interest rate is 7 percent?
a. $747.66
b. $756.00
c. $856.00
d. None of the above are correct to the nearest cent.
29. What is the future value of $375 at an interest rate of 3 percent one year from today?
a. $371.75
b. $386.25
c. $393.33
d. None of the above are correct to the nearest cent.
30. What is the future value of $450 at an interest rate of 9 percent two years from today?
a. $534.65
b. $546.35
c. $565.18
d. $574.13
31. At an annual interest rate of 10 percent, about how many years will it take $100 to double
in value?
a. 5
b. 7
c. 9
d. 11
32. At an annual interest rate of 10 percent, about how many years will it take $100 to triple
in value?
a. 8
b. 10
c. 12
d. 14
33. At an annual interest rate of 14 percent, about how many years will it take $100 to double
in value?
a. 3
b. 4
c. 5
d. 7
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34. At an annual interest rate of 20 percent, about how many years will it take $100 to triple
in value?
a. 5
b. 6
c. 8
d. 9
35. If you put $250 into an account with a 4 percent interest rate, how many years would
you have to wait to have $432.92?
a. 10
b. 14
c. 17
d. 20
6560 The Basic Tools of Finance
36. If you presently have $50,000 saved and earn 15 percent interest per year, about how
many years will it take for your investment to triple?
a. 6
b. 8
c. 10
d. 12
37. You put $75 in the bank one year ago and forgot about it. The bank sends you a notice
that you now have $81 in your account. What interest rate did you earn?
a. 5 percent
b. 6 percent
c. 7 percent
d. 8 percent
