Question

QUESTION 1 If the market interest rate is 5 percent, the present value of $200 to be paid to you at the end of two years is _____.​ a. ​$210.00 b. ​$95.23 c. ​$225.78 d. ​$190.00 e. ​$181.41

QUESTION 2 One reason investors may prefer bonds over stocks is that:​ a. ​interest rates do not affect the value of bonds. b. ​potential profits are larger for bondholders. c. ​bond prices never vary in the long run. d. ​bondholders get paid before stockholders. e. ​owning bonds implies owning a part of the company.

QUESTION 3 If you win $1 million in a lottery and are paid in installments, _____. a. the future value of the payments is less than $1 million if the interest rate is equal to zero b. the future value of these payments is $1 million c. the present value of these payments equals $1 million if the interest rate is 10 percent d. the present value of the payments exceeds $1 million if the interest rate is positive e. the present value of these payments equals $1 million if the interest rate is zero

QUESTION 4 Which of the following is true of lending by banks? a. Banks charge lower rates of interest to people with poor credit ratings. b. Banks always charge a lower rate of interest on a car loan than a home loan. c. Banks require borrowers to put up collateral to reduce the risk of lending. d. Banks discount the present value of loans to reduce the risk of lending. e. Banks increase their prime rate of lending to protect their loans.

QUESTION 5 Sally loves to see a movie as soon as it is released in theaters. This is an example of:​ a. ​diminishing marginal utility. b. ​utility maximization. c. ​a positive rate of time preference. d. ​Pareto optimality. e. ​relative preference.

QUESTION 6 If the expected rate of return from a purchase of equipment is greater than the market interest rate, the firm should _____.​ a. ​inform stockholders that the firm expects a decrease in earnings from the purchase b. ​seek government assistance in increasing the market interest rate c. ​purchase the equipment d. ​not purchase the equipment e. ​seek government assistance in decreasing the market interest rate

Answer 1

Question 1

Amount to be received at the end of the two years (F) = $200

Interest rate (i) = 5% or 0.05

Time period (n) = 2 years

Calculate the present value -

Present value = F/(1+i)ⁿ

Present value = $200/(1+0.05)²

Present value = $200/1.1025

Present value = $181.41

The present value would be $181.41

Hence, the correct answer is the option (e).

Question 2

Bond prices move in opposite direction of the interest rate.

Risk is lower in case of bonds relative to stocks and so profits are higher in stocks relative to bonds.

in the event of the winding up of the company, bond holders are paid before the stockholders.

Bondholders are creditors of the company.

So,

One reason investors may prefer bonds over stocks is that bondholders get paid before stockholders.

Hence, the correct answer is the option (d).