The Basic Tools of Finance 6621
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
6622 The Basic Tools of Finance
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
The Basic Tools of Finance 6623
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
6624 The Basic Tools of Finance
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.
The Basic Tools of Finance 6625
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. option A.
b. option B.
c. option C.
d. either option A or option B because Will is indifferent between those two options and
they are superior to option C.
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.
6626 The Basic Tools of Finance
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
The Basic Tools of Finance 6627
6628 The Basic Tools of Finance
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. an interest rate of 5 percent, with the bank charging you a $15 processing fee at the
time you open your account
b. an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your
account
c. an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you
open your account
d. an interest rate of 4.5 percent, with no processing fee and no bonus
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. an interest rate of 5 percent, with the bank charging you a $50 processing fee at the
time you open your account
b. an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you
open your account
c. an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your
account
d. an interest rate of 4.5 percent, with no processing fee and no bonus
The Basic Tools of Finance 6629
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
d. $1814.06
6630 The Basic Tools of Finance
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.
The Basic Tools of Finance 6631
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.
6632 The Basic Tools of Finance
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
The Basic Tools of Finance 6633
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.
6634 The Basic Tools of Finance
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.
The Basic Tools of Finance 6635
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.
6636 The Basic Tools of Finance
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.
The Basic Tools of Finance 6637
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.
6638 The Basic Tools of Finance
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%.
The Basic Tools of Finance 6639
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.
6640 The Basic Tools of Finance