CHAPTER 11: Asset Markets
MULTIPLE CHOICE
1. Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 45
dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 15 dollars
each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for
the wine if he buys it as an investment? (Pick the closest answer.)
a.
76 dollars
b.
45 dollars
c.
150 dollars
d.
495 dollars
e.
71 dollars
2. Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 70
dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 10 dollars
each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for
the wine if he buys it as an investment? (Pick the closest answer.)
a.
770 dollars
b.
100 dollars
c.
70 dollars
d.
75 dollars
e.
91 dollars
3. Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 30
dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 15 dollars
each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for
the wine if he buys it as an investment? (Pick the closest answer.)
a.
330 dollars
b.
150 dollars
c.
69 dollars
d.
30 dollars
e.
56 dollars
4. Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 60
dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 15 dollars
each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for
the wine if he buys it as an investment? (Pick the closest answer.)
a.
84 dollars
b.
150 dollars
c.
60 dollars
d.
660 dollars
e.
86 dollars
5. Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 40
dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 20 dollars
each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for
the wine if he buys it as an investment? (Pick the closest answer.)
a.
200 dollars
b.
40 dollars
c.
93 dollars
d.
440 dollars
e.
71 dollars
6. Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his
house as Chillingsworth. But Shivers has a larger house. Shivers’s annual fuel bill for home heating is
1,200 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%,
and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost
Shivers 1,200 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 13,200 dollars.
If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for
Shivers?
a.
Plan A.
b.
Plan B.
c.
Plan C.
d.
Plans A and B are equally good.
e.
He is best off using none of the plans.
7. Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his
house as Chillingsworth. But Shivers has a larger house. Shivers’s annual fuel bill for home heating is
1,100 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%,
and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost
Shivers 1,100 dollars, plan B would cost him 2,000 dollars, and plan C would cost him 12,100 dollars.
If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for
Shivers?
a.
Plan A.
b.
Plans A and B are equally good.
c.
Plan B.
d.
Plan C.
e.
He is best off using none of the plans.
8. Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his
house as Chillingsworth. But Shivers has a larger house. Shivers’s annual fuel bill for home heating is
1,200 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%,
and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost
Shivers 1,200 dollars, plan B would cost him 1,900 dollars, and plan C would cost him 13,200 dollars.
If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for
Shivers?
a.
Plan B.
b.
Plans A and B are equally good.
c.
Plan A.
d.
Plan C.
e.
He is best off using none of the plans.
9. Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his
house as Chillingsworth. But Shivers has a larger house. Shivers’s annual fuel bill for home heating is
700 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and
plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers
700 dollars, plan B would cost him 1,200 dollars, and plan C would cost him 7,700 dollars. If the
interest rate is 10% and his house and the insulation job last forever, which plan is the best for
Shivers?
a.
Plan A.
b.
Plan B.
c.
Plans A and B are equally good.
d.
Plan C.
e.
He is best off using none of the plans.
10. Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his
house as Chillingsworth. But Shivers has a larger house. Shivers’s annual fuel bill for home heating is
900 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and
plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers
900 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 9,900 dollars. If the
interest rate is 10% and his house and the insulation job last forever, which plan is the best for
Shivers?
a.
Plans A and B are equally good.
b.
Plan B.
c.
Plan A.
d.
Plan C.
e.
He is best off using none of the plans.
11. The price of an antique is expected to rise by 9% during the next year. The interest rate is 11%. You
are thinking of buying an antique and selling it a year from now. You would be willing to pay a total
of 900 dollars for the pleasure of owning the antique for a year. How much would you be willing to
pay to buy this antique? (See Problem 5.)
a.
8,181.82 dollars
b.
18,900 dollars
c.
900 dollars
d.
45,000 dollars
e.
9,000 dollars
12. The price of an antique is expected to rise by 6% during the next year. The interest rate is 7%. You are
thinking of buying an antique and selling it a year from now. You would be willing to pay a total of
600 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay
to buy this antique? (See Problem 5.)
a.
12,600 dollars
b.
60,000 dollars
c.
600 dollars
d.
8,571.43 dollars
e.
6,000 dollars
13. The price of an antique is expected to rise by 4% during the next year. The interest rate is 9%. You are
thinking of buying an antique and selling it a year from now. You would be willing to pay a total of
400 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay
to buy this antique? (See Problem 5.)
a.
400 dollars
b.
8,400 dollars
c.
4,444.44 dollars
d.
8,000 dollars
e.
4,000 dollars
14. The price of an antique is expected to rise by 5% during the next year. The interest rate is 10%. You
are thinking of buying an antique and selling it a year from now. You would be willing to pay a total
of 500 dollars for the pleasure of owning the antique for a year. How much would you be willing to
pay to buy this antique? (See Problem 5.)
a.
5,000 dollars
b.
10,000 dollars
c.
10,500 dollars
d.
500 dollars
e.
5,000 dollars
15. The price of an antique is expected to rise by 8% during the next year. The interest rate is 10%. You
are thinking of buying an antique and selling it a year from now. You would be willing to pay a total
of 800 dollars for the pleasure of owning the antique for a year. How much would you be willing to
pay to buy this antique? (See Problem 5.)
a.
40,000 dollars
b.
800 dollars
c.
8,000 dollars
d.
16,800 dollars
e.
8,000 dollars
16. A bond has a face value of 1,000 dollars. It will pay 100 dollars in interest at the end of every year for
the next 42 years. At the time of the final interest payment, 42 years from now, the company that
issued the bond will redeem the bond at face value. That is, the company will buy back the bond from
its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to
remain at 10%, how much would a rational investor pay for this bond right now?
a.
1,000 dollars
b.
5,200 dollars
c.
4,200 dollars
d.
More than any of the above amounts.
e.
Less than any of the above amounts.
17. A bond has a face value of 4,000 dollars. It will pay 400 dollars in interest at the end of every year for
the next 40 years. At the time of the final interest payment, 40 years from now, the company that
issued the bond will redeem the bond at face value. That is, the company will buy back the bond from
its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to
remain at 10%, how much would a rational investor pay for this bond right now?
a.
More than any of the amounts below.
b.
20,000 dollars
c.
16,000 dollars
d.
4,000 dollars
e.
Less than any of the above amounts.
18. A bond has a face value of 10,000 dollars. It will pay 1,000 dollars in interest at the end of every year
for the next 48 years. At the time of the final interest payment, 48 years from now, the company that
issued the bond will redeem the bond at face value. That is, the company will buy back the bond from
its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to
remain at 10%, how much would a rational investor pay for this bond right now?
a.
58,000 dollars
b.
10,000 dollars
c.
48,000 dollars
d.
More than any of the above amounts.
e.
Less than any of the above amounts.
19. A bond has a face value of 2,000 dollars. It will pay 200 dollars in interest at the end of every year for
the next 42 years. At the time of the final interest payment, 42 years from now, the company that
issued the bond will redeem the bond at face value. That is, the company will buy back the bond from
its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to
remain at 10%, how much would a rational investor pay for this bond right now?
a.
8,400 dollars
b.
2,000 dollars
c.
10,400 dollars
d.
More than any of the above amounts.
e.
Less than any of the above amounts.
20. A bond has a face value of 1,000 dollars. It will pay 100 dollars in interest at the end of every year for
the next 44 years. At the time of the final interest payment, 44 years from now, the company that
issued the bond will redeem the bond at face value. That is, the company will buy back the bond from
its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to
remain at 10%, how much would a rational investor pay for this bond right now?
a.
1,000 dollars
b.
5,400 dollars
c.
4,400 dollars
d.
More than any of the above amounts.
e.
Less than any of the above amounts.
21. The sum of the terms of the infinite geometric series 1, 0.83, 0.832, 0.833, . . . is closest to
a.
infinity.
b.
1.83.
c.
5.88.
d.
0.55.
e.
120.48.
22. The sum of the terms of the infinite geometric series 1, 0.78, 0.782, 0.783, . . . is closest to
a.
infinity.
b.
1.78.
c.
0.56.
d.
4.55.
e.
128.21.
23. The sum of the terms of the infinite geometric series 1, 0.93, 0.932, 0.933, . . . is closest to
a.
1.93.
b.
infinity.
c.
0.52.
d.
14.29.
e.
107.53.
24. The sum of the terms of the infinite geometric series 1, 0.95, 0.952, 0.953, . . . is closest to
a.
1.95.
b.
0.51.
c.
20.
d.
infinity.
e.
105.26.
25. The sum of the terms of the infinite geometric series 1, 0.78, 0.782, 0.783, . . . is closest to
a.
0.56.
b.
infinity.
c.
4.55.
d.
1.78.
e.
128.21.
26. If the interest rate is 5% and will remain 5% forever, how much would a rational investor be willing to
pay for an asset that will pay him 6,300 dollars 1 year from now, 1,102 dollars 2 years from now, and
nothing at any other time?
a.
7,000 dollars
b.
6,000 dollars
c.
140,000 dollars
d.
42,000 dollars
e.
8,000 dollars
27. If the interest rate is 13% and will remain 13% forever, how much would a rational investor be willing
to pay for an asset that will pay him 6,780 dollars 1 year from now, 1,276 dollars 2 years from now,
and nothing at any other time?
a.
53,846.15 dollars
b.
6,000 dollars
c.
98,000 dollars
d.
7,000 dollars
e.
8,000 dollars
28. If the interest rate is 6% and will remain 6% forever, how much would a rational investor be willing to
pay for an asset that will pay him 8,480 dollars 1 year from now, 1,123 dollars 2 years from now, and
nothing at any other time?
a.
9,000 dollars
b.
63,000 dollars
c.
150,000 dollars
d.
8,000 dollars
e.
10,000 dollars
29. If the interest rate is 15% and will remain 15% forever, how much would a rational investor be willing
to pay for an asset that will pay him 3,450 dollars 1 year from now, 1,322 dollars 2 years from now,
and nothing at any other time?
a.
4,000 dollars
b.
26,666.67 dollars
c.
64,000 dollars
d.
3,000 dollars
e.
5,000 dollars
30. If the interest rate is 19% and will remain 19% forever, how much would a rational investor be willing
to pay for an asset that will pay him 2,380 dollars 1 year from now, 1,416 dollars 2 years from now,
and nothing at any other time?
a.
2,000 dollars
b.
3,000 dollars
c.
15,789.47 dollars
d.
60,000 dollars
e.
4,000 dollars