Chapter 4

Question 1

future value equation

Answer 1

present * ( interest rate +1)

Question 2

The value on some future date of an investment made today is called ______.

Answer 2

future value

Question 3

The future value of a financial investment ________ as its time to maturity increases due to _______.

Answer 3

rises; compound interest

Question 4

When an investment is repaid over more than one year, it is subject to interest on the interest, which is also known as ______.

Answer 4

compound interest

Question 5

After figuring out the amount of money you’ll need to retire comfortably, you calculate the amount you’ll need to invest now to have that amount when you retire in twenty years. To do so, you should calculate ______.

Answer 5

present value

Question 6

Which of the following is true about compound interest?

Answer 6

interest earned on interest

Question 7

The value today of a payment that is promised in the future is called ______.

Answer 7

present value

Question 8

Size of the future payment
the time until the payment is made,
nterest rate are all properties of

Answer 8

present value

Question 9

Which of the following would we calculate to determine future value?

Answer 9

How much a financial investment made today will be worth later

Question 10

We expect (all else equal) present value to be higher when

Answer 10

low interest rate

Question 11

In general, an investment should be made if its internal rate of return

Answer 11

is greater than the cost of borrowing to make the investment.

Question 12

The internal rate of return can be defined as the interest rate that equates

Answer 12

the present value of an investment with its cost.

Question 13

Which of the following is a property of present value?

Answer 13

The size of the future payment

The interest rate

The time until the payment is made

Question 14

We can tell from the present value formula that, all else equal, present value falls when which of the following occurs?

Answer 14

The time until payment rises.

Question 15

You own a factory that produces clothing and are wondering whether you should borrow to purchase a new machine that processes textiles. To make your decision. you should set the present value of the revenues generated by the machine equal to _______.

Answer 15

the cost of the machine

Question 16

A 10-year, fixed payment loan would involve

Answer 16

10 equal payments

Question 17

The interest rate that equates the present value of an investment with its cost is called ______.

Answer 17

internal rate of return

Question 18

On the maturity date of a coupon bond, the bond issuer will pay

Answer 18

face value of bond

Question 19

In general, an investment should be made if its internal rate of return

Answer 19

is greater than the cost of borrowing to make the investment.

Question 20

The price of a coupon bond includes the present value of

Answer 20

coupon and principal payments

Question 21

Suppose you are considering borrowing money to purchase a new piece of capital for your firm. You should borrow the money for the capital so long as the

Answer 21

internal rate of return exceed the cost of borrowing.

Question 22

The present value of bond principle equals _____.

Answer 22

F / (1+i)^n

Question 23

Which of the following is true about coupon bonds?

Answer 23

Coupon bonds are the most common type of bond.

Question 24

What amount should a bond buyer be willing to pay for a coupon bond?

Answer 24

present value of its payments

Question 25

In terms of fixed payments,

Answer 25

the longer the payments go on, the higher their value.

the higher the interest rate, the lower the present value.

Question 26

The value of a coupon bond falls as the value of its yearly coupon payments falls. Which of the following does not explain why this is so?

Answer 26

The lower the interest rate, the lower the present value of future payments.

Question 27

The present value of three consecutive, yearly, $50 payments made at 5% interest is _____.

Answer 27

136.16

Question 28

On the maturity date of a coupon bond, the bond issuer will pay

Answer 28

face value of bond

Question 29

Which of the following is true about the real interest rate and the nominal interest rate?

Answer 29

The real interest rate is adjusted for inflation, while the nominal interest rate is not.

Question 30

In terms of fixed payments,

Answer 30

the longer the payments go on, the higher their value.

Question 31

The value of a coupon bond varies _____ with the value of its yearly coupon payments and _______ with the interest rate paid on it.

Answer 31

directly, inversely

Question 32

The Fisher equation implies that, all else equal, higher expected inflation is

Answer 32

generally associated with higher nominal interest rates.

Question 33

The nominal interest rate is generally _________; the real interest rate is generally _________.

Answer 33

observed, estimated

Question 34

In your car loan contract, the interest rate is listed as 7%. Inflation is expected to be 3% throughout the duration of the loan. Which of the following is therefore true?

Answer 34

The nominal interest rate is 7%.

The nominal interest rate is the rate in the contract, unadjusted for inflation: 7%. The nominal interest rate minus the expected inflation rate is the real interest rate: here, 7% – 3% = 4%.

Question 35

An interest rate that is expressed in current-dollar terms is called ______.

Answer 35

nominal interest rate