Problem 1: The yield curve is
a. inverted when short term rates are higher than long term rates
b. normal when it slopes upward to the right
c. a plot of interest rates versus term, also called the term structure of interest rates
d. all of the above
Problem 2: The federal government can always avoid default on its issues because of its unique right to:
a. change Treasury bond yields to zero at its
discretion.
c. tax.
b. print money. d. wage war.
Problem 3: Which exchange does not have a physical location?
a. New York Stock Exchange (NYSE)
b. American Stock Exchange (AMEX)
c. National Association of Securities Dealers Automated Quotation System (NASDAQ)
d. Securities and Exchange Commission (SEC)
Problem 4: Which of the following statements about time lines is false?
a. A time line is a graphic portrayal of a time value problem.
b. Time zero is the present point in time.
c. Future time periods are to the right of zero.
d. Time is portrayed along a vertical line.
Problem 5: The higher the rate of interest:
a. the larger the present value of a future sum of money
b. the smaller the future value of an amount invested today
c. the smaller the present value of a future sum of money
d. all of the above
Problem 6: The process of finding present values is frequently called
a. annualizing c. discounting
b. compounding d. leasing
Problem 7: If the interest rate is 0%,
a. future amounts have zero present value.
b. future amounts have an infinite present value.
c. the present value of amounts to be received in the future is equal to the sum of those amounts.
d. the future value of an investment is less than the sum of its cash flows.
Problem 8: Which of the following would increase the future value of an amount?
a. an increase in the interest rate
b. an increase in the amount
c. an increase in the time until future value is to be received
d. a and b
e. all of the above
Problem 9: Opportunity cost is the:
a. benefit that would have been available from the next best use of money.
b. prime rate for large firms.
c. unemployment rate.
d. rate on standard savings accounts.
Problem 11: You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases.
a. it will be worth less c. it will not change
b. it will be worth more d. none of the above
Problem 12: Assume that you have just won $5,000,000 in the lottery and will receive $250,000 per year for the next 20 years. How much is your prize worth today if the interest rate is 8%?
a. $1,072,731 c. $2,185,219
b. $2,454,525 d. $1,165,250
Problem 13: You are considering buying a new car. The sticker price is $15,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10% and you wish to pay for the car over a 5-yearperiod, what are your monthly car payments?
a. $216.67 d. $285.78
b. $252.34 e. $318.71
c. $276.21
Problem 14: You want to purchase a car for $40,000 when you graduate in two years. At that time you will take out a 5-year bank loan at 12% compounded monthly. Based on your estimated earnings, you think you'll be able to afford loan payments of $750 per month. You plan to save up the difference between the cost of the car and the amount you'll borrow by making quarterly deposits over the next two years in a bank account that pays 8% compounded quarterly. How large must those deposits be? (Round to the nearest dollar)
a. $523 c. $732
b. $637 d. $845