Question

What is the present value (PV) of $500 paid in 1 year if the current interest rate on assets with a similar level of risk is $7%? (i.e. you want to earn 7% interest)

Question options:

	$500
	$535
	$467.29
	We don't have enough information to tell.

Your aunt tells you that she will give you $100 today. However, if you are willing to wait, she will give you $105 in one year. You are convinced your aunt will follow through, so there is no risk in waiting. In this case,

Question options:

	you will wait for the $105 in one year, because it's more than $100.
	you will wait for the $105 in one year, if the current market interest rate is less than 5%.
	you will wait for the $105 in one year, if the current market interest rate is more than 5%.
	you will take the $100 today, because you know that a dollar received today is worth more than a dollar received in the future.

A financial security pays $200 in 2 years. You are guaranteed to get paid, so there is no risk involved. You know that you can place your money in the bank and receive 4% interest. How much are you willing to pay for the $200 financial security?

Question options:

	$184.91
	$192.31
	$200
	$216.32

Answer 1

a)

Future value =FV=$500

Rate of interest=i=0.07 per year

Number of periods=n=1 (year)

PV=FV/(1+i)ⁿ=500/(1+0.07)¹=$467.29

Correct option is

$467.29

b)

Future value of $100 at interest rate of 0.05 is given by

FV=PV*(1+i)ⁿ=100*(1+0.05)¹=$105

Offer of $105 in one year is attractive if current interest rate is lower than 0.05.

So, correct option is

you will wait for the $105 in one year, if the current market interest rate is less than 5%.

c)

Future value =FV=$200

Rate of interest=i=0.04 per year

Number of periods=n=2 (years)

PV=FV/(1+i)ⁿ=200/(1+0.04)²=$184.91

Correct option is

$184.91