Understanding interest rates

Understanding Interest Rates

4.1 Measuring Interest Rates

1) The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
Answer: A

2) The present value of an expected future payment ________ as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected
Answer: A

3) An increase in the time to the promised future payment ________ the present value of the payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
Answer: A

4) With an interest rate of 6 percent, the present value of $100 next year is approximately
A) $106.
B) $100.
C) $94.
D) $92.
Answer: C

5) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?
A) $453.51
B) $500.00
C) $476.25
D) $550.00
Answer: A

6) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
Answer: B

7) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of
A) face value.
B) par value.
C) deflation.
D) discounting the future.
Answer: D

8) A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: A

9) A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: B

10) Which of the following are true of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B)