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Exam 27: The Basic Tools of Finance

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Question 51

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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

E) B) and C)
F) A) and B)

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Question 52

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Which of the following changes would increase the present value of a future payment?

A) an increase in the size of the payment
B) an increase in the time until the payment is made
C) an increase in the interest rate
D) All of the above are correct.

E) A) and B)
F) C) and D)

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Question 53

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Suppose that fundamental analysis shows a stock is overvalued

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

In the late 1990s,Fed Chair Alan Greenspan believed that the market was

As the interest rate increases,the present value of future sums decrease,so firms will find fewer investment projects profitable.

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: receive $2,000 five years from now.The interest rate is 15% per year.Rank these three options from highest present value to lowest present value.

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

Of the following interest rates which is the highest one at which the present value of $200 ten years from today is greater than $150?

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Write the rule of 70.Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600.Use the rule of 70 to determine about what interest rate she earned.

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

If you put $125 into an account that paid 1.25 percent interest how much money to the nearest penny,would you have in the account in two years?

Alex says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest.Brian says that the present value of $400 one year from today if the interest rate is 4 percent is more than the present value of $400 two years from today if the interest rate is 2 percent.

George knows that he has about $95 dollars in his account.He knows he earned an interest rate of 4 percent,but he doesn't remember how much he opened the account with a year ago.How much did he put in?

The field of finance primarily studies

If the interest rate is 5 percent,what is the present value of a payment of $500 to be made one year from today?

Brittany wants to have about $500,000 when she retires in 10 years.She has $200,000 to deposit now.Which of the following interest rates would get her savings the closest to $500,000?

List three different ways that a risk-averse person can reduce financial risk.

John says that the future value of $250 saved for one year at 6 percent is less than the future value of $250 saved for two years at 3 percent.George says that the present value of a $250 payment in one year when the interest rate is 6 percent is less than the value of a $250 payment in two years when the interest rate is 3 percent.