158. Holding money for the transactions motive implies the need to hold money for:
A. spending.
B. emergencies.
C. impulses.
D. speculation.
159. If I am worried about the price of assets such as bonds falling, I may be more inclined to
hold money instead. You hold cash for the:
A. transactions motive.
B. precautionary motive.
C. speculative motive.
D. impulsive motive.
160. A month ago, you bought a one-year bond with a value of $100 that pays a fixed interest
rate of 5 percent per year. The interest rate of the economy was also 5 percent. Today you read
in the newspaper that the interest rate in the economy increased to 6 percent. You are holding a
bond that is:
A. highly desirable to other investors.
B. less desirable to other investors.
C. not desirable at all.
D. desirable to you.
161. What is the function of risk premium?
A. To make sure that the value of the bond rises with inflation.
B. To compensate bondholders for the chance the borrower will not repay the loan.
C. To distinguish short from long-term bonds.
D. To raise the return to holding government bonds.
162. If you expect interest rates to rise, you will want to be holding:
A. more money because bond prices will likely fall.
B. less money because bond prices will likely rise.
C. more money because bond prices will likely rise.
D. less money because bond prices will likely fall.
163. When interest rates rise, bond prices:
A. rise.
B. fall.
C. do not change.
D. could either rise or fall.
164. If the interest rate falls, the value of a fixed rate bond:
A. rises.
B. falls.
C. remains the same.
D. cannot be determined as to whether it rises or falls.
165. Two bonds, one a 30-year bond and the other a 1-year bond, have the same interest rate. If
the interest rate in the economy falls, the value of the:
A. long-term bond rises by more than the value of the short-term bond rises.
B. short-term bond rises by more than the value of the long-term bond rises.
C. long-term bond falls by more than the value of the short-term bond falls.
D. short-term bond falls by more than the value of the long-term bond falls.
166. A month ago, you bought a one-year bond with a value of $100 that pays a fixed interest
rate of 5 percent per year. The interest rate of the economy was also 5 percent. Today you read
in the newspaper that the interest rate in the economy decreased to 3 percent. You are holding a
bond that is:
A. more desirable to other investors.
B. less desirable to other investors.
C. not desirable at all.
D. desirable to you.
167. Present value is a method of:
A. calculating the interest that will be earned on an asset.
B. translating the current value of an asset into its future value.
C. translating the future value of an asset into its current value.
D. calculating the principal and interest payments on a loan.
168. The present value of a future payment:
A. is constant.
B. is independent of when the payment is received.
C. is independent of the market interest rate.
D. varies depending on when the payment is received and the market interest rate.
169. The present value of an asset generally:
A. exceeds the future value.
B. equals the future value.
C. is less than the future value.
D. has an ambiguous relationship with the future value.
170. As the interest rate increases, the present value of a payment received in the future:
A. increases.
B. decreases.
C. remains constant.
D. may or may not change depending on other factors.
171. If I will receive a payment of $121 two years from now and the annual interest rate is 10
percent, the present value of the payment is:
A. $90.
B. $100.
C. $110.
D. $146.41.
172. If a payment received two years from now has a present value of $200 and the annual
interest rate on the payment is 5 percent, then the future value of the payment is:
A. $171.50.
B. $190.50.
C. $210.50.
D. $220.50.
173. Many state lotteries have advertised “instant millionaire” lottery games. However, if one
wins the game, the state does not write a check for a million dollars. Rather it pays $50,000 a
year for 20 years. Using the tables shown and assuming the interest rate is 4, which of the
following statements must be true?
A. Since the winner will be given actually a million dollars over 20 years, the state is correct in
advertising these games as “instant millionaire.”
B. If the winner invests his annual payout, at the end of 20 years he will have a lot more than a
million dollars. Hence the state is understating the winnings when it advertises these games as
“instant millionaire.”
C. The true value of winning is much less than a million. The state has misrepresented the true
value of the payout.
D. The state does not care whether it gives a million as a lump sum or spread over twenty years.
174. The winner of the Mega Millions lottery game can choose to accept a one-time payout of
$190.1 million or receive $11 million per year for 30 years. Assuming no tax consequences using
the tables shown, and assuming the interest rate is 4 percent what is the best decision for the
winner?
A. Take the payout over 30 years because that’s more money.
B. Take the $190.1 today because that’s more money.
C. It does not matter because the two payouts cannot be compared.
D. It does not matter because the two sums have roughly equal time values.
175. The winner of the Mega Millions lottery game can choose to accept a one-time payout of
$163.68 million or receive $11 million per year for 20 years. Using the tables shown and
assuming the interest rate is 3 percent, the state:
A. prefers to pay the lump sum because it saves about $100 million.
B. probably does not care—it has set the lump sum equal to the present value of the payments
over time.
C. prefers to pay over time because it will save money.
D. probably does not know which is better because the two cannot be compared.
176. If a bank deposit will double in value in 18 years, the rule of 72 implies that the interest
rate on the deposit must equal is approximately:
A. 3 percent.
B. 4 percent.
C. 6 percent.
D. 8 percent.
177. According to the rule of 72, a savings account with an interest rate of 12 percent will
double in value in approximately:
A. 3 years.
B. 6 years.
C. 8.5 years.
D. 10 years.
178. Using the annuity rule, it follows that an annuity with a present value of $100 and an
annual payment of $20 must have an interest rate of:
A. 2 percent.
B. 5 percent.
C. 10 percent.
D. 20 percent.
179. Using the annuity rule, an annuity that pays $10 annually has a present value of $200 if the
market interest rate is:
A. 5 percent.
B. 10 percent.
C. 15 percent.
D. 20 percent.
180. Using the annuity rule, we can infer that an increase in the market interest rate from 5 to 10
percent will:
A. halve the present value of an annuity.
B. double the present value of an annuity.
C. not change the present value of an annuity.
D. have an unknown effect on the present value of an annuity.
181. You own 100 shares of stock that are earning $2 per share per year. According to market
analysts, the stock is expected to continue to earn $2 long into the future. Using the annuity rule,
and assuming an interest rate of 6.5 percent, it follows that the present value of these 100 shares
is:
A. $30.77.
B. $307.79.
C. $3,076.92.
D. $30,076.92.