Future Value, Present Value, And Interest Ch4 Full Test Bank

Student name:__________

1) Larry and Darrell each put $2,000 in the bank on the same day and keep in there for 3 years where the money earns 5% interest every year. Larry leaves his money, including interest, in the bank the whole time. Darrell withdraws the interest earned each year and spends it, but he leaves the whole principal of $2,000 in the bank the whole time.

a. Fill in the table, showing how much interest each investor earns annually.
b. Explain when simple interest might be a rational choice.

2) A lender expects to earn a real interest rate of 4.5% over the next 12 months. She charges a 9.25% (annual) nominal rate for a 12-month loan. What inflation rate is she expecting? If the lender is in a 30% marginal tax bracket, the borrower in a 25% marginal tax bracket, and they both have the same inflation expectations, what are the real after-tax rates each expects?

3) Compute the interest rate for a $1,000 face value a bond that sells for $280 and matures in 20 years. The bond has no coupon payments, only the face value payment.

4) Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time. Use 6, 10, and 20 years into the future. Do the amounts increase or decrease over time? Explain.

5) Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

6) Calculate which has a higher present value: an annual payment of $100 received over 3 years or an annual payment of $50 received over 7 years. In both cases the interest rate is 7% (or 0.07).

7) What is the monthly interest rate if you are asked to convert a 12% annual rate to a monthly rate? (Calculate to 4 decimal places.)

8) Convert each of the following basis points amounts to percents.

a) 412.5

b) 10

c) 125.7

d) 1075

e) 1

9) Using the rule of 72, determine the approximate time it will take $1,000 to double given the following annual interest rates.

a) 5.5%

b) 10.0%

c) 30.0%

d) 2.0%

e) 4.5%

10) What will be the amount owed at the end of one year if a borrower charges $100 on their credit card and doesn't make any payments during the year (assume the interest rate is 1.5% per month)?

11) Which investment plan will provide the highest future value: $500 invested at 5 percent annually for four years and then that balance invested at 7 percent annually for an additional three years, or $500 invested at 6 percent annually for seven years?

12) Suppose that you have a winning lottery ticket for $100,000. The State of California doesn't pay this amount up front—this is the amount you will receive over time. The State offers you two options. The first pays you $80,000 up front and that will be the entire amount. The second pays you winnings over a three-year period. The last option pays you a large payment today with small payments in the future. The payment options are detailed in the following table.

Compute the present value of each payment option, assuming the interest rate is 12%. Now, compute the present values based on an interest rate of 5%. Compare your answers, explaining why they are different when the interest rate changes. When the interest rate is 5%, the present values are as follows.

13) Briefly discuss the relationship between present value and each of the following.

a) future value

b) time

c) interest rate

14) An investment grows from $2,000 to $2,750 over the period of 10 years. What average annual growth rate will produce this result?

15) Calculate the internal rate of return for a machine that costs $500,000 and provides annual revenue of $115,000 per year for 5 years. You can assume all revenue is received once a year at the end of the year.

16) You win your state lottery. The lottery officials offer you the following options: you can accept annual payments of $50,000 for 20 years or receive an upfront payment of $700,000. Ignoring issues like mortality tables, taxes, etc., and assuming the first payment is made immediately, what market interest rate would make it more attractive to take the upfront payment?

17) You are considering purchasing a home. You find one that you like but you realize that you will need to obtain a mortgage for $100,000. The mortgage company presents you with two options: a 15-year mortgage at a 6.0% annual rate and a 30-year mortgage at a 6.5% annual rate. What will be the fixed annual payment for each mortgage?

18) A bond offers a $50 coupon, has a face value of $1,000, and has 10 years to maturity. If the interest rate is 4.0% what is the value of this bond?

19) A bond offers a $40 coupon, has a face value of $1,000, and 10 years to maturity. If the interest rate is 5.0%, what is the value of this bond?

20) Suppose a two-year coupon bond has payments of $40 and a face value of $800. The interest rate is 8%. Compute the present value of the coupon payments (PCP) and the principal payment of the bond (PBP). What is the price of this bond (P)?

21) Suppose you negotiate a one-year loan with a principal of $1000 and the nominal interest rate is currently 7%. You expect the inflation rate to be 3% over the next year. When you repay the principal plus interest at the end of the year, the actual inflation rate is 2.5%. Compute the ex ante and ex post real interest rate. Who benefits from this unexpected decrease in inflation? Who loses?

22) In the data from the text, we observe that countries with high inflation rates tend to have high nominal interest rates. What does this imply, if anything, about real interest rates in countries with very high inflation rates?

23) Explain why an increase in expected inflation will result in an increase in nominal interest rates, holding other factors constant.

24) Explain why, if real interest rates are so important, we see most interest rates quoted in nominal terms.

25) If a borrower and a lender agree on a long-term loan at a nominal interest rate that is fixed over the duration of the loan, how will a higher-than-expected rate of inflation impact the parties if at all?

26) Explain why countries with high and volatile inflation rates are likely to have volatile nominal interest rates.

27) Use an example to explain why the Fisher equation is not highly accurate at high rates of inflation.

28) An individual is currently 30 years old, wants to work until the age of 65, and plans on dying at the age of 85. How much will the individual need to have saved by the time he or she is 65 if he or she plans on spending $40,000 per year while retired? You can assume the individual can earn an interest rate of 5.0% and the $40,000 is in addition to any Social Security that may be received.

29) How might the behavior of professional investment managers prior to the financial crisis of 2007–2009 have contributed to the depth of the plunge of corporate and mortgage security prices during the crisis?

30) Explain why an investor cannot simply compare the size of promised payments from different investments, even if the interest rates and other risk factors are the same.

31) Historically, many cultural groups have outlawed usury, or the practice of levying interest on loans. Some groups oppose usury because it exacerbates problems of income inequality (as wealthier individuals can afford to lend to poorer individuals), while others claim investment and loans should be made charitably. Evaluate these arguments against usury based on your knowledge of present value. Do such prohibitions make sense?

32) How has Islamic banking redefined lending to deal with Islam's prohibition of usury?

33) Discussions in recent years about the vulnerability of the Social Security System cause some people to feel the payments promised will not materialize. Discuss the possible changes we might observe if this feeling becomes prevalent among today’s workers.

34) During the early 1980s, the U.S. economy experienced an increase in interest rates quoted on U.S. Treasury debt, business loans, and mortgages. At the same time, the inflation rate gradually declined more than expected. What happened to ex ante versus ex post real interest rates during this period? Use the Fisher equation to support your answer.

35) Explain why countries that have volatile inflation rates are likely to have high nominal interest rates.

36) Explain the suggestion that people may have their own "personal discount rate" and how that may affect decisions about borrowing and other financial matters.

37) A promise of a $100 payment to be received one year from today is

A) more valuable than receiving the payment today.
B) less valuable than receiving the payment two years from now.
C) equally valuable as a payment received today if the interest rate is zero.
D) not enough information is provided to answer the question.

38) What links the present to the future in financial markets?

A) risk
B) information
C) interest rates
D) stability

39) The future value of $100 at a 5% per year interest rate at the end of one year is

A) $95.00.
B) $105.00.
C) $97.50.
D) 107.50.

40) Credit

A) probably came into being at the same time as coinage.
B) predates coinage by 2,000 years.
C) did not exist until the Middle Ages.
D) first became popular due to the writings of Aristotle.

41) Which one of the following expresses 5.65%?

A) 0.565
B) 0.00565
C) 5.65
D) 0.0565

42) Which one of the following expresses 4.85%?

A) 0.0485
B) 4.850
C) 0.00485
D) 0.485

43) Which one of the following expresses 5.5%?

A) 0.0055
B) 5.50
C) 0.550
D) 0.0550

44) If the interest rate is zero, a promise to receive a $100 payment one year from now is

A) more valuable than receiving $100 today.
B) less valuable than receiving $100 today.
C) equal in value to receiving $100 today.
D) equal in value to receiving $101 today.

45) Why is it important to understand present value and future value when studying financial markets? These tools

A) are useful for evaluating risk.
B) tell us how to invest in the stock market.
C) are useful for analyzing the benefits of hedging investments.
D) help us compare the value of a payments made at different points in time.

46) If a saver has a positive rate of time preference then the present value of $100 to be received 1 year from today is

A) more than $100.
B) not calculable.
C) less than 100.
D) unknown to the saver.

47) Ceteris paribus, which increases as interest rates rise—present value or future value?

A) both
B) neither
C) only present value
D) only future value

48) Present value is higher when the future value of the payment is

A) higher, the time until payment is shorter, and the interest rate is lower.
B) lower, the time until payment is shorter, and the interest rate is higher.
C) higher, the time until payment is longer, and the interest rate is lower.
D) lower, the time until payment is shorter, and the interest rate is higher.

49) Which one of the following best expresses the proceeds a lender receives from a one-year simple loan when the annual interest rate equals i?

A) PV + i
B) FV/ i
C) PV(1 + i)
D) PV/ i

50) Suppose Tom receives a one-year loan from ABC Bank for $5,000.00. At the end of the year, Tom repays $5,400.00 to ABC Bank. Assuming the simple calculation of interest, the interest rate on Tom's loan was

A) $400
B) 8.00%
C) 7.41%
D) 20%

51) Suppose Mary receives an $8,000 loan from First National Bank. Mary repays $8,480 to First National Bank at the end of one year. Assuming the simple calculation of interest, the interest rate on Mary's loan was

A) 8.00%
B) $480
C) 6.00%
D) 5.66%

52) An investor deposits $400 into a bank account that earns an annual interest rate of 8%. Based on this information, how much interest will he earn during the second year alone?

A) $25.60
B) $32.00
C) $34.56
D) $64.00

53) Compound interest means that

A) you get an interest deduction for paying your loan off early.
B) you get interest on interest.
C) you get an interest deduction if you take out a loan for longer than one year.
D) interest rates will rise on larger loans.

54) How does compound interest make your money “work for you”?

A) It provides an interest deduction when you pay your loan off early.
B) You earn interest on interest in addition to interest on principal.
C) It provides an interest deduction if you take out a loan for longer than one year.
D) It provides higher interest rates on larger loans with longer time horizons.

55) Which one of the following best expresses the payment a saver receives for investing her money for two years?

A) PV + PV
B) PV + PV (1 + i)
C) PV(1 + i)²
D) 2 PV(1 + i)

56) Suppose a family wants to save $60,000 for a child's tuition. The child will be attending college in 18 years. For simplicity, assume the family is saving for a one-time college tuition payment. If the interest rate is 6%, then about how much does this family need to deposit in the bank today?

A) $10,000
B) $21,000
C) $42,000
D) $57,000

57) Which one of the following best expresses the payment a lender receives for lending money for three years?

A) 3PV
B) PV × (1 + i)³
C) 3PV/(1 + i)³
D) FV/ (1 + i)³

58) Suppose Paul borrows $4,000 for one year from his grandfather who charges Paul 7% interest. At the end of the year Paul will have to repay his grandfather how much money?

A) $4,280
B) $4,290
C) $4,350
D) $4,820

59) Suppose that Stephen Curry, a basketball player for the Golden State Warriors, will become a free agent at the end of this NBA season. Suppose that Curry is considering two possible contracts from different teams as shown in the table. Note that the salaries are paid at the end of EACH year. The interest rate is 10%. Based on this information, which one of the statements below is true?

A) Curry should take the Boston contract because it has a higher present value.
B) Curry should take the Portland contract because it has a higher present value.
C) Curry is indifferent between the two contracts because they are both worth $12 million.
D) Curry is indifferent between the two contracts because they are both worth $10.9 million.

60) Farou invests $2,000 at 8% interest. About how long will it take for Farou to double his investment (i.e., to have $4,000)?

A) 4 years
B) 5 years
C) 8 years
D) 9 years

61) A lender is promised a $100 payment (including interest) one year from today. If the lender has a 6% opportunity cost of money, they should be willing to accept what amount today?

A) $100.00
B) $106.20
C) $96.40
D) $94.34

62) A saver knows that if she put $95 in the bank today she will receive $100 from the bank one year from now, including the interest she will earn. What is the interest rate she is earning?

A) 5.10%
B) 6.00%
C) 5.52%
D) 5.26%

63) Tom deposits funds in his savings account at the bank which is paying 3.5% interest. If he keeps his funds in the bank for one year he will have $155.25. What amount is Tom depositing?

A) $151.75
B) $150.00
C) $148.75
D) $147.50

64) Mary deposits funds into a CD at her bank. The CD has an annual interest of 4.0%. If Mary leaves the funds in the CD for two years she will have $540.80. What amount is Mary depositing?

A) $520.00
B) $514.50
C) $500.00
D) $512.40

65) Mary deposits funds into a CD at her bank. The CD has an annual interest of 4.0%. If Mary leaves the funds in the CD for two years she will have $540.80. Assuming no penalties for withdrawing the funds early, what amount would Mary have at the end of one year?

A) $521.60
B) $490.00
C) $500.00
D) $520.00

66) Sharon deposits $150.00 in her savings account at the bank. At the end of one year she has $156.38. What was the interest rate that Sharon earned?

A) 4.25%
B) 6.38%
C) 4.52%
D) 5.63%

67) The value of $100 left in a savings account earning 5% a year, will be worth what amount after ten years?

A) $150.00
B) $160.50
C) $159.84
D) $162.89

68) The value of $100 left in a certificate of deposit for four years that earns 4.5% annually will be

A) $120.00.
B) $119.25.
C) $117.00.
D) $145.00.

69) The future value of $100 that earns 10% annually for n years is best expressed by which one of the following?

A) $100(0.1)ⁿ
B) $100 ×n × (1.1)
C) $100(1.1)ⁿ
D) $100/(1.1)ⁿ

70) The future value of $200 that is left in account earning 6.5% interest for three years is best expressed by which one of the following?

A) $200(1.065) × 3
B) $200(1.065)/3
C) $200(1.065)ⁿ
D) $200(1.065)³

71) Which one of the following best expresses the future value of $100 left in a savings account earning 3.5% for three and a half years?

A) $100(1.035)^3.5
B) $100(0.35)^3.5
C) $100 × 3.5 × (1.035)
D) $100(1.035)³/2

72) Which one of the following best expresses the present value of $500 that you have to wait four years and three months to receive?

A) ($500/4.25)(1 + i)
B) $500 × 4.25 × (1 + i)
C) $500/(1 + i)^4.25
D) ($500/4) × (1 + i)³

73) If 10% is the annual rate, considering compounding, the monthly rate is

A) 0.0833%.
B) 0.833%.
C) 0.80%.
D) 1.0833%.

74) What is the future value of $1,000 after six months earning 12% annually?

A) $1,050.00
B) $1,060.00
C) $1,120.00
D) $1,058.30

75) In reading the national business news, you hear that mortgage rates increased by 50 basis points. If mortgage rates were initially at 6.5%, what are they after this increase?

A) 6.55%
B) 7.0%
C) 11.5%
D) 56.5%

76) One hundred basis points could be expressed as

A) 0.01%.
B) 1.00%.
C) 100.0%.
D) 0.10%.

77) The decimal equivalent of a basis point is

A) 0.0001
B) 1.00
C) 0.001
D) 0.01

78) According to the rule of 72,

A) any amount should double in value in 72 months if invested at 10%.
B) 72/interest rate is the approximate number of years it will take for an amount to double.
C) 72 × interest rate is the number of years it will take for an amount to double.
D) the interest rate divided by the number of years invested will always equal 72%.

79) The rule of 72 says that at 6% interest $100 should become $200 in about

A) 72 months.
B) 100 months.
C) 12 years.
D) 7.2 years.

80) What is the present value of $200 promised two years from now at 5% annual interest?

A) $190.00
B) $220.00
C) $180.00
D) $181.41

81) What is the present value of $100 promised one year from now at 10% annual interest?

A) $89.50
B) $90.00
C) $90.91
D) $91.25

82) What is the present value of $500 promised four years from now at 5% annual interest?

A) $411.35
B) $400.00
C) $607.75
D) $520.00

83) The higher the future value of the payment the

A) lower the present value.
B) higher the present value.
C) future value doesn't impact the present value, only the interest rate really matters.
D) lower the present value because the interest rate must fall.

84) The shorter the time until a payment the

A) higher the present value.
B) lower the present value because time is valuable.
C) lower must be the interest rate.
D) higher must be the interest rate.

85) The lower the interest rate, i, the

A) lower is the present value.
B) greater must be n.
C) higher is the present value.
D) higher is the future value.

86) Doubling the future value will cause

A) the present value to fall by half.
B) the interest rate, i, to double.
C) no change to present value, only the interest rate.
D) the present value to double.

87) Doubling the future value will cause the

A) present value to double.
B) present value to decrease.
C) present value to increase by less than 100%.
D) interest rate, i, to decrease.

88) The present value (pv) and the interest rate (i) have

A) a direct relationship; as i increases, pv increases.
B) an inverse relationship; as i increases, pv decreases.
C) an unclear relationship; whether it is direct or inverse depends on the interest rate.
D) no relationship.

89) At any fixed interest rate, an increase in time, n, until a payment is made

A) increases the present value.
B) has no impact on the present value since the interest rate is fixed.
C) reduces the present value.
D) affects only the future value.

90) A change in the interest rate

A) has a smaller impact on the present value of a payment to be made far into the future than on one to be made sooner.
B) will not make a difference in the present values of two equal payments to be made at different times.
C) has a larger impact on the present value of a payment to be made far into the future than on one to be made sooner.
D) has a larger impact on the present value of a bigger payment to be made far into the future than on one of lesser value.

91) A monthly growth rate of 0.5% is an annual growth rate of

A) 6.00%.
B) 5.00%.
C) 6.17%.
D) 6.50%.

92) A monthly growth rate of 0.6% is an annual growth rate of

A) 7.20%.
B) 6.00%.
C) 7.60%.
D) 7.44%.

93) A monthly interest rate of 1% is a compounded annual rate of

A) 12.68%.
B) 10.00%.
C) 14.11%.
D) 6.00%.

94) An investment has grown from $100.00 to $130.00 or by 30% over four years. What annual increase gives a 30% increase over four years?

A) 7.50%
B) 6.30%
C) 6.78%
D) 7.24%

95) An investment grows from $100.00 to $150.00 or 50% over five years. What annual increase gives a 50% increase over five years?

A) 12.00%
B) 10.00%
C) 9.25%
D) 8.45%

96) The "coupon rate" is

A) the annual amount of interest payments made on a bond as a percentage of the amount borrowed.
B) the change in the value of a bond expressed as a percentage of the amount borrowed..
C) another name for the yield on a bond, assuming the bond is sold before it matures.
D) the total amount of interest payments made on a bond as a percentage of the amount borrowed.

97) Higher savings usually requires higher interest rates because

A) everyone prefers to save more instead of consuming.
B) saving requires sacrifice and people must be compensated for this sacrifice.
C) higher savings means we expect interest rates to decrease.
D) of the rule of 72.

98) If a business owner is considering whether to borrow money to purchase a new machine that generates a stream of revenue over time, the decision process involves two primary steps. Which one of the following best summarizes the two steps?

A) Calculate the internal rate of return on the investment in the machine and then compare that return to the cost of buying the machine.
B) Calculate the internal rate of return on the investment in the machine and then calculate whether the stream of revenue covers the payments on the loan.
C) Find out if the bank will approve the loan and then calculate the internal rate of return on the investment in the machine.
D) Secure venture capital to finance the purchase of the machine and then pay dividends from the revenue stream generated.

99) The internal rate of return of an investment is

A) the same as return on investment.
B) zero when the present value of an investment equals its cost.
C) the interest rate that equates the present value of an investment with its cost.
D) equal to the market rate of interest when an investment is made.

100) If the internal rate of return from an investment is more than the opportunity cost of funds the firm should

A) make the investment.
B) not make the investment.
C) only make the investment using retained earnings.
D) only make part of the investment and wait to see if interest rates decrease.

101) A mortgage, where the monthly payments are the same for the duration of the loan, is an example of a(n)

A) variable payment loan.
B) installment loan.
C) fixed payment loan.
D) equity security.

102) An investment carrying a current cost of $120,000 is going to generate $50,000 of revenue for each of the next three years. To calculate the internal rate of return we need to

A) calculate the present value of each of the $50,000 payments and multiply these and set this equal to $120,000.
B) find the interest rate at which the present value of $150,000 for three years from now equals $120,000.
C) find the interest rate at which the sum of the present values of $50,000 for each of the next three years equals $120,000.
D) subtract $120,000 from $150,000 and set this difference equal to the interest rate.

103) Usually an investment will be profitable if

A) the internal rate of return is less than the cost of borrowing.
B) the cost of borrowing is equal to the internal rate of return.
C) it is financed with retained earnings.
D) the cost of borrowing is less than the internal rate of return.

104) Data generally show that the lifetime value of a college education is worth the cost. When is the investment in a college education not worth it?

A) When a student does not incur debt to go to college
B) When a student incurs debt and does not complete a degree program
C) When a student incurs debt attending a top-ranked university and earns a degree that is in demand
D) When a student incurs debt with a lower real interest rate than the average annual return from earning the degree

105) A coupon bond is a bond that

A) always sells at a price that is less than the face value.
B) provides the owner with regular payments.
C) pays the owner the sum of the coupons at the bond's maturity.
D) pays a variable coupon rate depending on the bond's price.

106) The coupon rate for a coupon bond is equal to the

A) annual coupon payment divided by the face value of the bond.
B) annual coupon payment divided by the purchase price of the bond.
C) purchase price of the bond divided by the coupon payment.
D) annual coupon payment divided by the selling price of the bond.

107) If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of

A) $425.00.
B) $4.25.
C) $42.50.
D) a value that cannot be determined from the information provided.

108) If a bond has a face value of $1,000 and the bondholder receives coupon payments of $27.50 semi-annually, the bond's coupon rate is

A) 2.75%.
B) 5.50%.
C) 27.5%.
D) a value that cannot be determined from the information provided.

109) Consider a bond that costs $1,000 today and promises a one-time future payment of $1,080 in four years. What is the approximate interest rate on this bond?

A) 2%
B) 4%
C) 8%
D) 10.8%

110) Which one of the following is necessarily true of coupon bonds?

A) The price exceeds the face value.
B) The coupon rate exceeds the interest rate.
C) The price is equal to the coupon payments.
D) The price is the sum of the present value of the coupon payments and the present value of the face value.

111) The price of a coupon bond will increase as the

A) face value decreases.
B) yield increases.
C) coupon payments increase.
D) term to maturity is shorter.

112) Suppose the nominal interest rate on a one-year car loan is 8% and the inflation rate is expected to be 3% over the next year. Based on this information, we know that

A) the ex ante real interest rate is 5%.
B) the lender benefits more than the borrower because of the difference in the nominal versus real interest rates.
C) at the end of the year, the borrower pays only 5% in nominal interest.
D) the ex post real interest rate 11%.

113) Interest rates that are adjusted for expected inflation are known as

A) coupon rates.
B) ex ante real interest rates.
C) ex post real interest rates.
D) nominal interest rates.

114) The price of a coupon bond is determined by taking the present value of

A) the bond's final payment and subtracting the coupon payments.
B) the coupon payments and adding this to the face value.
C) the bond's final payment.
D) all of the bond's payments.

115) Compounding refers to the

A) calculation of after tax interest returns.
B) internal rate of return a firm earns on an investment.
C) real interest return after taxes.
D) process of earning interest on both the principal and the interest of an investment.

116) The interest rate that equates the price of a bond with the present value of its payments

A) will vary directly with the value of the bond.
B) should be the one that makes the value equal to the par value of the bond.
C) will vary inversely with the value of the bond.
D) should always be greater than the coupon rate.

117) A credit card that charges a monthly interest rate of 1.5% has an effective annual interest rate of

A) 18.0%.
B) 19.6%.
C) 15.0%.
D) 17.50%.

118) Which formula below best expresses the real interest rate, ( r)?

A) i = r − π^e
B) r = i + π^e
C) r = i − π^e
D) π^e = i + r

119) A borrower who makes a $1,000 loan for one year and earns interest in the amount of $75, earns what nominal interest rate and what real interest rate if inflation is 2.0%?

A) A nominal rate of 5.5% and a real rate of 2.0%.
B) A nominal rate of 7.5% and a real rate of 5.0%.
C) A nominal rate of 7.5% and a real rate of 9.5%.
D) A nominal rate of 7.5% and a real rate of 5.5%.

120) As inflation increases, for any fixed nominal interest rate, the real interest rate

A) also increases.
B) remains the same, that's why it is real.
C) decreases.
D) decreases by less than the increase in inflation.

121) Considering the data on real and nominal interest rates for the United States from 1979 to 2018, we can say that

A) the real interest rate remains unchanged over time.
B) there have been times when the real interest rate has been negative.
C) nominal interest rates were higher in 2000 than they had been at any other point in time.
D) the inflation rate is always greater than the real interest rate.

122) Which one of the following statements is most correct?

A) We can always compute the ex post real interest rate but not the ex ante real rate.
B) We cannot compute either the ex post or ex ante real interest rates accurately.
C) We can accurately compute the ex ante real interest rate but not the ex post real rate.
D) We can always compute both the ex post real interest rate and the ex ante real rate accurately.

123) Suppose you are risk-averse, and you received an unexpected bonus at work. Why might a financial advisor recommend that you use the money to pay down some of your debt?

A) Debt is bad.
B) The recommendation applies if you have credit card debt.
C) The return received from paying down debt is nearly always higher than any available riskless return.
D) The unexpected bonus cannot be used to open a new investment portfolio if you don’t already have one.

124) The Fisher equation shows that, in general, the nominal interest rate and expected inflation are:

A) positively related
B) negatively related
C) not related
D) curve linearly related

125) If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, they should charge a nominal interest rate that equals

A) at least 0%.
B) at least 6%.
C) at least 7%.
D) more than 7%.

126) If a lender charges a nominal interest rate of 6% and expects inflation to be 3%, they expect to earn a real interest rate of

A) 0%.
B) 2%.
C) 3%.
D) 9%.

127) We should expect a country that experiences volatile inflation to also have

A) volatile nominal interest rates.
B) volatile real interest rates but stable nominal rates.
C) stable nominal interest rates.
D) volatile real interest rates.