Chapter 07 Interest Rates and Present Value

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Chapter 07 Interest Rates and Present Value"

Transcription

1 Chapter 07 Interest Rates and Present Value Multiple Choice Questions 1. The percentage of a balance that a borrower must pay a lender is called the a. Inflation rate b. Usury rate C. Interest rate d. Monetary index 2. In a market for money, it is typically the case that we use the in a supply and demand model. a. Inflation rate B. Interest rate c. Wage rate d. Monetary index 3. In a supply and demand model for the market for money, we typically use the to look at savers' behavior a. The demand curve B. The supply curve c. The production possibilities frontier d. The surplus curve 4. In a supply and demand model for the market for money, we typically use the to look at borrowers' behavior A. The demand curve b. The supply curve c. The production possibilities frontier d. The surplus curve 7-1

2 Use Figure 7.1 to answer questions 5-8: Figure Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 1 is a. "$" for the amount borrowed/saved b. "$*" for the equilibrium amount borrowed/saved C. "r" for interest rate d. "r*" for equilibrium interest rate 6. Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 3 is a. "$" for the amount borrowed/saved b. "$*" for the equilibrium amount borrowed/saved c. "r" for interest rate D. "r*" for equilibrium interest rate 7-2

3 7. Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 4 is a. "$" for the amount borrowed/saved B. "$*" for the equilibrium amount borrowed/saved c. "r" for interest rate d. "r*" for equilibrium interest rate 8. Assuming that Figure 7.1 is a market for money that can be borrowed or saved, Box 6 is A. "$" for the amount borrowed/saved b. "$*" for the equilibrium amount borrowed/saved c. "r" for interest rate d. "r*" for equilibrium interest rate 9. If people (who used to neither borrow nor save) are now saving for their retirement then this will cause the A. Supply for loanable funds to increase b. Demand for loanable funds to increase c. Supply for loanable funds to decrease d. Demand for loanable funds to decrease 10. If people (who used to neither borrow nor save) are now saving for their retirement then this will cause the equilibrium interest rate a. To rise B. To fall c. To fluctuate wildly d. To remain constant 11. If people (who used to neither borrow nor save) are now borrowing to put their kids through college then this will cause the a. Supply for loanable funds to increase B. Demand for loanable funds to increase c. Supply for loanable funds to decrease d. Demand for loanable funds to decrease 7-3

4 12. If people (who used to neither borrow nor save) are now borrowing to put their kids through college then this will cause the equilibrium interest rate A. To rise b. To fall c. To fluctuate wildly d. To remain constant 13. In the market for loanable dollars, an increase in the profitability of investments overall will be revealed in a. An increase in the supply of loanable dollars B. An increase in the demand for loanable dollars c. A decrease in the supply of loanable dollars d. A decrease in the demand for loanable dollars 14. The difference between nominal and real interest rates is that a. Real interest rates are almost always greater than nominal interest rates B. Real interest rates are what you get after having adjusted nominal rates for inflation c. Nominal interest rates are what lenders receive and real interest rates are what borrowers pay d. Nominal interest rates are what borrowers pay and real interest rates are what lenders receive 15. When evaluating whether or not to make an investment one should focus on the because doing so takes into account anticipated inflation. a. Nominal interest rate b. Exchange rate C. Real interest rate d. Junk bond rate 7-4

5 16. If the inflation rate is 3% and the real interest rate is 4%, then the nominal interest rate is a. 1% b. 3% C. 7% d. 12% 17. If the inflation rate is 2% and the real interest rate is 1%, then the nominal interest rate is a. -1% b. 1% c. 2% D. 3% 18. If the inflation rate is 5% and the real interest rate is 4%, then the nominal interest rate is a. -1% b. 1% C. 9% d. 20% 19. If the inflation rate is 6% and the real interest rate is 4%, then the nominal interest rate is a. 2% b. -2% c. 6% D. 10% 20. If the inflation rate is 3% and the nominal interest rate is 4%, then the real interest rate is A. 1% b. 3% c. 7% d. 12% 7-5

6 21. If the inflation rate is 2% and the nominal interest rate is 1%, then the real interest rate is A. -1% b. 1% c. 2% d. 3% 22. If the inflation rate is 5% and the nominal interest rate is 4%, then the real interest rate is A. -1% b. 1% c. 9% d. 20% 23. When evaluating a business decision, an economist will often resort to the use of present value because a. The profits may not be large enough to warrant the time and attention of the investor B. The investment occurs in one time period and the profits in another c. The investment is often in one currency and the profits in another d. The investment is often under one set of managers and the profits under another 24. To determine whether an investment makes sense a business will compute the net present value and if the result is a. Negative they will make the investment B. Positive they will make the investment c. Positive they will not make the investment unless the interest rate rises d. Positive they will not make the investment regardless of the change in interest rates 7-6

7 25. If a business makes the determination that an investment makes sense at the current interest rate but before they can act the interest rates rises A. They will have to recalculate whether it still makes sense b. It will only make the situation better so they will clearly make the investment c. It will cause them to not make the investment regardless of the increase d. They will go ahead with the investment because interest rates have nothing to do with whether an investment makes sense 26. If a business makes the determination that an investment makes sense at the current interest rate but before they can act the interest rates fall a. They will have to recalculate whether it still makes sense B. It will only make the situation better so they will clearly make the investment c. It will cause them to not make the investment regardless of the decrease d. They will go ahead with the investment because interest rates have nothing to do with whether an investment makes sense 27. If the interest rate is positive, the present value of a stream of payments is a. Greater than the sum of the actual payments over time B. Less than the sum of the actual payments over time c. Equal to the sum of the actual payments over time d. Unrelated to the stream of actual payments over time 28. If the interest rate is positive, the present value of $1000 to be received in ten years is A. Less than $1000 b. Greater than $1000 c. Equal to $1000 d. Either greater than $1000 or less than $1000, depending upon the interest rate 7-7

8 29. Suppose your grandmother told you (today) that she had set aside an amount of money in a savings account bearing 3% interest that was sufficient to give you a $5,000 graduation present in exactly four years. How much would she have had to set aside? a. $5000 b. $5000 x (1.03)4 C. $5000 / (1.03)4 d. $5000 / (1+.034) 30. Using an interest rate of 5%, which figure has the largest present value A. $5000 b. $5050 to be received two years from now c. $5075 to be received three years from now d. $5500 to be received ten years from now 31. Using an interest rate of 5%, which figure has the smallest present value a. $5000 b. $5050 to be received two years from now c. $5075 to be received three years from now D. $5500 to be received ten years from now 32. The present value of a $1000 payment received 2 years from now at 5% annual interest will be less than $900 because of a. Taxes B. Compounding c. Withholding d. Double jeopardy 33. A 60 month car loan (where no down payment was made) with a 6% interest rate and a monthly payment of $500 would allow the borrower to buy a a. $35,500 car b. $30,000 car C. $25,863 car d. $28,200 car 7-8

9 34. If payments of $1000 are to be received every year for 20 years and if the interest rate is positive, the present value of this stream will A. Exceed $1000x20 ($20,000) b. Equal $1000x20 ($20,000) c. Be less than $1000x20 ($20,000) d. Increase as the interest rate increases 35. If you know that you can afford a $500 per month car payment for the next 48 months, the interest rate is positive and you have found a car dealer who will agree to a zero down payment you will a. Be able to afford a $25,000 car (which is more than $500x48) b. Be able to afford a $24,000 car (which is exactly $500x48) C. Be able to afford something less than a $24,000 car d. Be able to finance a more expensive car when the interest rate is high 36. If you have a business opportunity that is pretty much a sure thing that will require you to borrow $1,000,000, but will return to you $200,000 a year in profit for ten years, this is a. A wise investment regardless of interest rates b. An unwise investment regardless of interest rates C. An investment which depends on the interest rate that must be paid on the loan d. An investment which will be more attractive when the interest rate is high 37. If you are anticipating having to pay $100,000 to a lender 10 years from now and the interest rate rises, the present value of this sum A. Falls b. Rises c. Remains unchanged d. First rises, then falls 7-9

10 38. If you are anticipating having to pay $100,000 to a lender 10 years from now and the interest rate falls, the present value of this sum a. Falls B. Rises c. Remains unchanged d. Becomes more uncertain 39. If your broker tells you that a trust to which you are a beneficiary has changed and instead of getting $5000 per year starting next year you will be getting $4000 per year starting next year, the present value to you has A. Fallen b. Risen c. Remained unchanged d. Necessarily become more predictable 40. If your broker tells you that a trust to which you are a beneficiary has changed and instead of getting $5000 per year starting next year you will be getting $6000 per year starting next year the present value to you has a. Fallen B. Risen c. Remained unchanged d. Necessarily become more predictable 41. If your broker tells you that a trust to which you are a beneficiary has changed and instead of getting $5000 per year starting next year you will be getting $6000 per year but it will be starting the year after next the present value to you has a. Fallen b. Risen c. Remained unchanged D. Might have either fallen or risen, depending on the interest rate 7-10

11 42. The possibility that an investor will not receive full payment is called a. An advance b. Credit c. The index problem D. Risk 43. The form of risk to the lender associated with a borrower not paying their debt is called a. Market risk B. Default risk c. Overall risk d. Complete risk 44. The form of risk to the investor associated with the asset unexpectedly falling in price is called A. Market risk b. Default risk c. Overall risk d. Complete risk 45. The reward investors receive for accepting the probability that they will not be fully paid as agreed or as anticipated is called the a. Risk adjustment B. Risk premium c. Interest rate d. Real interest rate 46. The relationship between the rate of return earned on a bond and the length of time until the bond matures is called the a. Interest rate b. Real interest rate c. Calendar D. Yield curve 7-11

12 47. The interest rate at which the present value of costs equals the present value benefits is the a. Coupon interest rate b. Yield to maturity C. Internal rate of return d. Market interest rate 48. If an investment requires payment of $10,000 now and promises to return a single payout of $15,000 one year from now, the net present value of the investment at an interest rate of 12% is approximately A. $3,393 b. $5,000 c. $10,000 d. $13, If an investment requires payment of $5,000 now and promises to return a single payout of $15,000 one year from now, the net present value of the investment at an interest rate of 10% is approximately a. $3,636 B. $8,636 c. $10,000 d. $13, If an investment requires payment of $10,000 now and promises to return a payout of $15,000 one year from now and another payout of $15,000 two years from now, the net present value of the investment at an interest rate of 8% is approximately a. $5,000 b. $11,749 C. $16,749 d. $26,

Finance, Saving, and Investment

Finance, Saving, and Investment 23 Finance, Saving, and Investment Learning Objectives The flows of funds through financial markets and the financial institutions Borrowing and lending decisions in financial markets Effects of government

More information

Econ 202 Section 4 Final Exam

Econ 202 Section 4 Final Exam Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys $40

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common

More information

Exam 1 Sample Questions

Exam 1 Sample Questions Exam 1 Sample Questions 1. Asset allocation refers to. A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities C. the choice of specific assets

More information

The Money Market and the Interest Rate. 2003 South-Western/Thomson Learning

The Money Market and the Interest Rate. 2003 South-Western/Thomson Learning The Money Market and the Interest Rate 2003 South-Western/Thomson Learning Individuals Demand for Money An individual s quantity of money demanded is the amount of wealth that the individual chooses to

More information

Lesson 8 Save and Invest: The Rise and Fall of Risk and Return

Lesson 8 Save and Invest: The Rise and Fall of Risk and Return Lesson 8 Save and Invest: The Rise and Fall of Risk and Return Lesson Description This lesson begins with a brainstorming session in which students identify the risks involved in playing sports or driving

More information

Financial Plan for Your 30s

Financial Plan for Your 30s Financial Plan for Your 30s 0 5 10 15 20 25 30 35 40 Number of years 40 years 30 years 35 years 25 years CIR116014 Getting Started In their 30s, many workers have an established job and cash flow. With

More information

Topics Covered. Compounding and Discounting Single Sums. Ch. 4 - The Time Value of Money. The Time Value of Money

Topics Covered. Compounding and Discounting Single Sums. Ch. 4 - The Time Value of Money. The Time Value of Money Ch. 4 - The Time Value of Money Topics Covered Future Values Present Values Multiple Cash Flows Perpetuities and Annuities Effective Annual Interest Rate For now, we will omit the section 4.5 on inflation

More information

BOND - Security that obligates the issuer to make specified payments to the bondholder.

BOND - Security that obligates the issuer to make specified payments to the bondholder. Bond Valuation BOND - Security that obligates the issuer to make specified payments to the bondholder. COUPON - The interest payments paid to the bondholder. FACE VALUE - Payment at the maturity of the

More information

Interest Cost of Money Test - MoneyPower

Interest Cost of Money Test - MoneyPower Interest Cost of Money Test - MoneyPower Multiple Choice Identify the choice that best completes the statement or answers the question. 1. To determine the time value of depositing $100 in a savings account,

More information

Chapter 4 Consumption, Saving, and Investment

Chapter 4 Consumption, Saving, and Investment Chapter 4 Consumption, Saving, and Investment Multiple Choice Questions 1. Desired national saving equals (a) Y C d G. (b) C d + I d + G. (c) I d + G. (d) Y I d G. 2. With no inflation and a nominal interest

More information

2016 Wiley. Study Session 2: Quantitative Methods Basic Concepts

2016 Wiley. Study Session 2: Quantitative Methods Basic Concepts 2016 Wiley Study Session 2: Quantitative Methods Basic Concepts Reading 5: The Time Value of Money LESSO 1: ITRODUCTIO, ITEREST RATES, FUTURE VALUE, AD PREST VALUE The Financial Calculator It is very important

More information

VALUE 11.125%. $100,000 2003 (=MATURITY

VALUE 11.125%. $100,000 2003 (=MATURITY NOTES H IX. How to Read Financial Bond Pages Understanding of the previously discussed interest rate measures will permit you to make sense out of the tables found in the financial sections of newspapers

More information

Homework Assignment #2: Answer Key

Homework Assignment #2: Answer Key Homework Assignment #2: Answer Key Chapter 4: #3 Assuming that the current interest rate is 3 percent, compute the value of a five-year, 5 percent coupon bond with a face value of $,000. What happens if

More information

Econ 330 Exam 1 Name ID Section Number

Econ 330 Exam 1 Name ID Section Number Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth

More information

HILDA & JOHN ENHANCED ANNUITIES

HILDA & JOHN ENHANCED ANNUITIES HILDA & JOHN ENHANCED ANNUITIES 20 July 2015 OBJECTIVES 1. John would like to secure a known income stream so Hilda can live a bit better should he die in the next few years 2. Ensure you don t have to

More information

Time Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam

Time Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam Time Value of Money 2014 Level I Quantitative Methods IFT Notes for the CFA exam Contents 1. Introduction...2 2. Interest Rates: Interpretation...2 3. The Future Value of a Single Cash Flow...4 4. The

More information

APPENDIX. Interest Concepts of Future and Present Value. Concept of Interest TIME VALUE OF MONEY BASIC INTEREST CONCEPTS

APPENDIX. Interest Concepts of Future and Present Value. Concept of Interest TIME VALUE OF MONEY BASIC INTEREST CONCEPTS CHAPTER 8 Current Monetary Balances 395 APPENDIX Interest Concepts of Future and Present Value TIME VALUE OF MONEY In general business terms, interest is defined as the cost of using money over time. Economists

More information

7. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange

7. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange Econ 20B- Additional Problem Set 4 I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1. Institutions in the economy that help to match one person's

More information

380.760: Corporate Finance. Financial Decision Making

380.760: Corporate Finance. Financial Decision Making 380.760: Corporate Finance Lecture 2: Time Value of Money and Net Present Value Gordon Bodnar, 2009 Professor Gordon Bodnar 2009 Financial Decision Making Finance decision making is about evaluating costs

More information

What is an annuity? The basics Part 1 of 8

What is an annuity? The basics Part 1 of 8 What is an annuity? The basics Part 1 of 8 You may be considering an annuity, and, if that s the case, it is important that know what an annuity is and isn t. Basically, an annuity is a contract with an

More information

Introductory remarks by Jean-Pierre Danthine

Introductory remarks by Jean-Pierre Danthine abcdefg News conference Berne, 15 December 2011 Introductory remarks by Jean-Pierre Danthine I would like to address three main issues today. These are the acute market volatility experienced this summer,

More information

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy? 1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

More information

LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs.

LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs. LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs. 1. The minimum rate of return that an investor must receive in order to invest in a project is most likely

More information

LOCKING IN TREASURY RATES WITH TREASURY LOCKS

LOCKING IN TREASURY RATES WITH TREASURY LOCKS LOCKING IN TREASURY RATES WITH TREASURY LOCKS Interest-rate sensitive financial decisions often involve a waiting period before they can be implemen-ted. This delay exposes institutions to the risk that

More information

Guide to Reading the Whole Life Annual Statement

Guide to Reading the Whole Life Annual Statement Guide to Reading the Whole Life Annual Statement Whole Life Insurance offers guaranteed death benefit protection, guaranteed steady cash accumulation and guaranteed level premiums. It also provides dividends,

More information

How to make changes to your annuity income

How to make changes to your annuity income How to make changes to your annuity income What s inside 2 Is it time to make a change? 3 Your annuity income 5 TIAA Traditional income 7 TIAA and CREF variable income 10 Ways to adjust your annuity income

More information

3. Time value of money. We will review some tools for discounting cash flows.

3. Time value of money. We will review some tools for discounting cash flows. 1 3. Time value of money We will review some tools for discounting cash flows. Simple interest 2 With simple interest, the amount earned each period is always the same: i = rp o where i = interest earned

More information

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class.

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. 1 Definition of some core variables Imports (flow): Q t Exports (flow): X t Net exports (or Trade balance)

More information

Chapter 5: Valuing Bonds

Chapter 5: Valuing Bonds FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A long-term debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations

More information

Fin 5413 CHAPTER FOUR

Fin 5413 CHAPTER FOUR Slide 1 Interest Due Slide 2 Fin 5413 CHAPTER FOUR FIXED RATE MORTGAGE LOANS Interest Due is the mirror image of interest earned In previous finance course you learned that interest earned is: Interest

More information

It Is In Your Interest

It Is In Your Interest STUDENT MODULE 7.2 BORROWING MONEY PAGE 1 Standard 7: The student will identify the procedures and analyze the responsibilities of borrowing money. It Is In Your Interest Jason did not understand how it

More information

Time Value of Money Practice Questions Irfanullah.co

Time Value of Money Practice Questions Irfanullah.co 1. You are trying to estimate the required rate of return for a particular investment. Which of the following premiums are you least likely to consider? A. Inflation premium B. Maturity premium C. Nominal

More information

Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002).

Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Description of the model. This is a special case of a Mirrlees model.

More information

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING Topic One: Bond Pricing Principles 1. Present Value. A. The present-value calculation is used to estimate how much an investor should pay for a bond;

More information

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved.

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved. 2 The Mathematics of Finance Copyright Cengage Learning. All rights reserved. 2.3 Annuities, Loans, and Bonds Copyright Cengage Learning. All rights reserved. Annuities, Loans, and Bonds A typical defined-contribution

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Savings, Investment Spending, and the Financial System

Savings, Investment Spending, and the Financial System Savings, Investment Spending, and the Financial System 1. Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is

More information

Understanding Credit Personal Management Merit Badge

Understanding Credit Personal Management Merit Badge Understanding Credit Personal Management Merit Badge Kelsey Balcaitis Youth Financial Education Coordinator Class Rules Leave No Trace Wear your uniform to class A Scout is Trustworthy, Loyal, Helpful,

More information

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.)

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.) Chapter 6 Interest Rates And Bond Valuation Learning Goals 1. Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. 2. Review the legal aspects of bond financing

More information

SAVING & INVESTING WORKSHEET

SAVING & INVESTING WORKSHEET SAVING & INVESTING WORKSHEET 1) Use the Rule of 72 to approximate the following: $1,000 initial investment, at a 6% average annual return. What is the value after 36 years? A. $4,000 B. $6,000 B. $13,000

More information

Direct Transfer. Investment Banking. Investment Banking. Basic Concepts. Economics of Money and Banking. Basic Concepts

Direct Transfer. Investment Banking. Investment Banking. Basic Concepts. Economics of Money and Banking. Basic Concepts Basic Concepts Economics of Money and Banking 2014 South Carolina Bankers School Ron Best University of West Georgia rbest@westga.edu Risk and return: investors will only take on additional risk if they

More information

Invest in your future

Invest in your future Invest in your future Investing, and your Pensions NO BETTER TIME THAN THE PRESENT - Investing, and Your Pension The sooner you start investing, the better off you will be. Taking an early interest in

More information

Lecture 3: Put Options and Distribution-Free Results

Lecture 3: Put Options and Distribution-Free Results OPTIONS and FUTURES Lecture 3: Put Options and Distribution-Free Results Philip H. Dybvig Washington University in Saint Louis put options binomial valuation what are distribution-free results? option

More information

Time-Value-of-Money and Amortization Worksheets

Time-Value-of-Money and Amortization Worksheets 2 Time-Value-of-Money and Amortization Worksheets The Time-Value-of-Money and Amortization worksheets are useful in applications where the cash flows are equal, evenly spaced, and either all inflows or

More information

CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS

CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS 1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries

More information

14 ARITHMETIC OF FINANCE

14 ARITHMETIC OF FINANCE 4 ARITHMETI OF FINANE Introduction Definitions Present Value of a Future Amount Perpetuity - Growing Perpetuity Annuities ompounding Agreement ontinuous ompounding - Lump Sum - Annuity ompounding Magic?

More information

Fixed vs Flexible Exchange Rate Regimes

Fixed vs Flexible Exchange Rate Regimes Fixed vs Flexible Exchange Rate Regimes Review fixed exchange rates and costs vs benefits to devaluations. Exchange rate crises. Flexible exchange rate regimes: Exchange rate volatility. Fixed exchange

More information

FNCE 301, Financial Management H Guy Williams, 2006

FNCE 301, Financial Management H Guy Williams, 2006 Stock Valuation Stock characteristics Stocks are the other major traded security (stocks & bonds). Options are another traded security but not as big as these two. - Ownership Stockholders are the owner

More information

University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi. Chapter 29 Fiscal Policy

University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi. Chapter 29 Fiscal Policy University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi Chapter 29 Fiscal Policy 1) If revenues exceed outlays, the government's budget balance

More information

Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago, IL 60690-0834 Tel. (312) 322-5111 www.frbchi.org

Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago, IL 60690-0834 Tel. (312) 322-5111 www.frbchi.org Points of Interest is one of a series of essays adapted from articles in On Reserve, a newsletter for economic educators published by the Federal Reserve Bank of Chicago. The original article was written

More information

Obligation-based Asset Allocation for Public Pension Plans

Obligation-based Asset Allocation for Public Pension Plans Obligation-based Asset Allocation for Public Pension Plans Market Commentary July 2015 PUBLIC PENSION PLANS HAVE a single objective to provide income for a secure retirement for their members. Once the

More information

Introduction to Fixed Income & Credit. Asset Management

Introduction to Fixed Income & Credit. Asset Management Introduction to Fixed Income & Credit Asset Management Fixed Income explanation The Basis of Fixed Income is the need to purchase today with not enough cash available: ie. Mortgage or consumer loan You

More information

PRACTICE- Unit 6 AP Economics

PRACTICE- Unit 6 AP Economics PRACTICE- Unit 6 AP Economics Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The term liquid asset means: A. that the asset is used in a barter exchange.

More information

Ch. 11.2: Installment Buying

Ch. 11.2: Installment Buying Ch. 11.2: Installment Buying When people take out a loan to make a big purchase, they don t often pay it back all at once in one lump-sum. Instead, they usually pay it back back gradually over time, in

More information

Chapter 13 Money and Banking

Chapter 13 Money and Banking Chapter 13 Money and Banking Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. The most important function of money is (a) as a store of

More information

Chapter Two. Determinants of Interest Rates. McGraw-Hill /Irwin. Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Two. Determinants of Interest Rates. McGraw-Hill /Irwin. Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Two Determinants of Interest Rates Interest Rate Fundamentals Nominal interest rates - the interest rate actually observed in financial markets directly affect the value (price) of most securities

More information

TIME VALUE OF MONEY PROBLEM #7: MORTGAGE AMORTIZATION

TIME VALUE OF MONEY PROBLEM #7: MORTGAGE AMORTIZATION TIME VALUE OF MONEY PROBLEM #7: MORTGAGE AMORTIZATION Professor Peter Harris Mathematics by Sharon Petrushka Introduction This problem will focus on calculating mortgage payments. Knowledge of Time Value

More information

FinQuiz Notes 2 0 1 5

FinQuiz Notes 2 0 1 5 Reading 5 The Time Value of Money Money has a time value because a unit of money received today is worth more than a unit of money to be received tomorrow. Interest rates can be interpreted in three ways.

More information

SAMPLE MID-TERM QUESTIONS

SAMPLE MID-TERM QUESTIONS SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,

More information

Investment trusts and companies

Investment trusts and companies Investment trusts and companies INVESTMENT TRUSTS AND COMPANIES Investment trusts and investment companies can provide an excellent way to achieve a diversified portfolio of shares within one simple investment.

More information

Save and Invest Bonds

Save and Invest Bonds Lesson 6 Save and Invest Bonds Lesson Description In this lesson, students will learn that bonds are financial assets used to build wealth. Using the more familiar concept of bank loans, bonds are introduced

More information

Shares Mutual funds Structured bonds Bonds Cash money, deposits

Shares Mutual funds Structured bonds Bonds Cash money, deposits FINANCIAL INSTRUMENTS AND RELATED RISKS This description of investment risks is intended for you. The professionals of AB bank Finasta have strived to understandably introduce you the main financial instruments

More information

MetLife Income for Life Bond (UK and International) A guaranteed income for life s ups and downs

MetLife Income for Life Bond (UK and International) A guaranteed income for life s ups and downs MetLife Income for Life Bond (UK and International) A guaranteed income for life s ups and downs If you are asking yourself... How can I get a better return than bank deposits now interest rates are so

More information

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

More information

International Money and Banking: 12. The Term Structure of Interest Rates

International Money and Banking: 12. The Term Structure of Interest Rates International Money and Banking: 12. The Term Structure of Interest Rates Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) Term Structure of Interest Rates Spring 2015 1 / 35 Beyond Interbank

More information

Interest Rates and Bond Valuation

Interest Rates and Bond Valuation and Bond Valuation 1 Bonds Debt Instrument Bondholders are lending the corporation money for some stated period of time. Liquid Asset Corporate Bonds can be traded in the secondary market. Price at which

More information

Time Value of Money. Work book Section I True, False type questions. State whether the following statements are true (T) or False (F)

Time Value of Money. Work book Section I True, False type questions. State whether the following statements are true (T) or False (F) Time Value of Money Work book Section I True, False type questions State whether the following statements are true (T) or False (F) 1.1 Money has time value because you forgo something certain today for

More information

Key Concepts and Skills

Key Concepts and Skills Chapter 10 Some Lessons from Capital Market History Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand

More information

Office of Debt Management. Treasury Debt Management Strategy

Office of Debt Management. Treasury Debt Management Strategy Office of Debt Management Treasury Debt Management Strategy Overview Treasury may borrow on the credit of the United States Government amounts necessary for expenditures authorized by law and may issue

More information

LIFE INSURANCE STRATEGY GUIDE

LIFE INSURANCE STRATEGY GUIDE LIFE INSURANCE 101 STRATEGY GUIDE : STRATEGY GUIDE TABLE OF CONTENTS Why You May Need Life Insurance... 5 Shopping for Life Insurance... 5 How Much Life Insurance to Obtain... 6 Calculating Total Funds

More information

Mathematics. Rosella Castellano. Rome, University of Tor Vergata

Mathematics. Rosella Castellano. Rome, University of Tor Vergata and Loans Mathematics Rome, University of Tor Vergata and Loans Future Value for Simple Interest Present Value for Simple Interest You deposit E. 1,000, called the principal or present value, into a savings

More information

Effects on pensioners from leaving the EU

Effects on pensioners from leaving the EU Effects on pensioners from leaving the EU Summary 1.1 HM Treasury s short-term document presented two scenarios for the immediate impact of leaving the EU on the UK economy: the shock scenario and severe

More information

KEY MORTGAGE INFORMATION & EXPLANATIONS

KEY MORTGAGE INFORMATION & EXPLANATIONS KEY MORTGAGE INFORMATION & EXPLANATIONS THE SOCIETY Within this document reference to we us and our refers to the Society, full details of which are: Tipton & Coseley Building Society, 70 Owen Street,

More information

Chapter 11. International Economics II: International Finance

Chapter 11. International Economics II: International Finance Chapter 11 International Economics II: International Finance The other major branch of international economics is international monetary economics, also known as international finance. Issues in international

More information

CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial

More information

SFDCP TARGET DATE FUND PORTFOLIO SUMMARY: January 29, 2016

SFDCP TARGET DATE FUND PORTFOLIO SUMMARY: January 29, 2016 SFDCP TARGET DATE FUND PORTFOLIO SUMMARY: January 29, 2016 SFDCP Target Date Funds Overview SFDCP Target Date Funds (each, a Fund and collectively the Funds or the SFDCP Target Date Funds ) were developed

More information

Bonds and Yield to Maturity

Bonds and Yield to Maturity Bonds and Yield to Maturity Bonds A bond is a debt instrument requiring the issuer to repay to the lender/investor the amount borrowed (par or face value) plus interest over a specified period of time.

More information

I see old paper s and assignments most of. mcq s are given us from this book I want to. share all data to my all fellow s.

I see old paper s and assignments most of. mcq s are given us from this book I want to. share all data to my all fellow s. Page 1 Money, Banking and Financial Markets, 2/e Stephen G Cecchetti, Brandeis University I see old paper s and assignments most of mcq s are given us from this book I want to share all data to my all

More information

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 24 Money Price Inflation 1) Money is A) currency plus coins. B) the same as gold.

More information

THE TIME VALUE OF MONEY

THE TIME VALUE OF MONEY QUANTITATIVE METHODS THE TIME VALUE OF MONEY Reading 5 http://proschool.imsindia.com/ 1 Learning Objective Statements (LOS) a. Interest Rates as Required rate of return, Discount Rate and Opportunity Cost

More information

Click Here to Buy the Tutorial

Click Here to Buy the Tutorial FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

More information

The Young Investor s Guide To Understanding The Terms Used In Investing.

The Young Investor s Guide To Understanding The Terms Used In Investing. The Young Investor s Guide To Understanding The Terms Used In Investing. The Young Investor Dictionary compliments of Integrity Mutual Funds. YOUNG INVESTOR DICTIONARY Asset Something of value. The property

More information

WORKBOOK ON PROJECT FINANCE. Prepared by Professor William J. Kretlow University of Houston

WORKBOOK ON PROJECT FINANCE. Prepared by Professor William J. Kretlow University of Houston WORKBOOK ON PROJECT FINANCE Prepared by Professor William J. Kretlow University of Houston 2002 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. TABLE

More information

Introduction to Real Estate Investment Appraisal

Introduction to Real Estate Investment Appraisal Introduction to Real Estate Investment Appraisal NPV and IRR Pat McAllister INVESTMENT APPRAISAL DISCOUNTED CASFLOW ANALYSIS Investment Mathematics Discounted cash flow to calculate Gross present value

More information

An Attractive Income Option for a Strategic Allocation

An Attractive Income Option for a Strategic Allocation An Attractive Income Option for a Strategic Allocation Voya Senior Loans Suite A strategic allocation provides potential for high and relatively steady income through most credit and rate cycles Improves

More information

Lecture 2. Output, interest rates and exchange rates: the Mundell Fleming model.

Lecture 2. Output, interest rates and exchange rates: the Mundell Fleming model. Lecture 2. Output, interest rates and exchange rates: the Mundell Fleming model. Carlos Llano (P) & Nuria Gallego (TA) References: these slides have been developed based on the ones provided by Beatriz

More information

The Concept of Present Value

The Concept of Present Value The Concept of Present Value If you could have $100 today or $100 next week which would you choose? Of course you would choose the $100 today. Why? Hopefully you said because you could invest it and make

More information

Reverse Mortgages. An investment research policy for using reverse mortgages

Reverse Mortgages. An investment research policy for using reverse mortgages Reverse Mortgages An investment research policy for using reverse mortgages Table of contents Table of contents... 2 At a glance... 3 Introduction... 4 What is a reverse mortgage?... 4 Advantages and disadvantages...

More information

LOS 56.a: Explain steps in the bond valuation process.

LOS 56.a: Explain steps in the bond valuation process. The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

More information

Stock and Bond Valuation: Annuities and Perpetuities

Stock and Bond Valuation: Annuities and Perpetuities Stock and Bond Valuation: Annuities and Perpetuities Lecture 3, slides 3.1 Brais Alvarez Pereira LdM, BUS 332 F: Principles of Finance, Spring 2016 February 23, 2016 Important Shortcut Formulas Present

More information

Macquarie Significant Investor Visa Funds

Macquarie Significant Investor Visa Funds Macquarie Significant Investor Visa Funds Managed funds frequently asked questions For licensed financial advisers and licensed migration agents only only What does an investment in a managed fund entitle

More information

FNCE 301, Financial Management H Guy Williams, 2006

FNCE 301, Financial Management H Guy Williams, 2006 REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

More information

Financial Checkup. Use this Checkup to: Get Organized Identify the Gaps in Your Financial Life Work More Effectively With Your Financial Advisor

Financial Checkup. Use this Checkup to: Get Organized Identify the Gaps in Your Financial Life Work More Effectively With Your Financial Advisor Financial Use this to: Get Organized Identify the Gaps in Your Financial Life Work More Effectively With Your Financial Advisor Table of Contents Financial Topics: Page Investments General......................................

More information

Home Equity Loans and Credit Lines HELOC

Home Equity Loans and Credit Lines HELOC Home Equity Loans and Credit Lines HELOC If you re thinking about making some home improvements or looking at ways to pay for your child s college education, you may be thinking about tapping into your

More information

ANALYSIS OF FIXED INCOME SECURITIES

ANALYSIS OF FIXED INCOME SECURITIES ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its

More information

DEBT FUNDING GUIDELINES FOR LOCAL GOVERNMENT

DEBT FUNDING GUIDELINES FOR LOCAL GOVERNMENT DEBT FUNDING GUIDELINES FOR LOCAL GOVERNMENT The Context Local government financial statements, like those of other sectors of government and the corporate sector, include many items of considerable financial

More information

CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

More information

Chapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 4-1

Chapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 4-1 Chapter 6 Interest rates and Bond Valuation 2012 Pearson Prentice Hall. All rights reserved. 4-1 Interest Rates and Required Returns: Interest Rate Fundamentals The interest rate is usually applied to

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information