Question

Which of these statements is a correct reason for why I would prefer to receive money today than in the future?

                a.Because of inflation I can buy more in the future with the same amount of money

                b.Any day now paper money will be replaced with the gold standard

                c.I can invest it to make a return and it eliminates any uncertainty that I will receive it

                               

"I want to find the present value of $500 that I expect to receive in 3 years, assuming a discount rate of 10%. What formula do I use?"

               a.Divide $500 by (1.10)^3

                b.Multiply $500 by (1.10)^3

                c.Divide $1 by (500)^3

"Why is financial leverage referred to as a ""two-edged sword"" or a ""fair weather friend""?"

                a.It increases profits when investments make money and decreases losses when they lose money

                b.It increases profits when investments make money and increases losses when they lose money

                c.Bankers who loan money tend to unfriendly people

"Which of these techniques do rating agencies, the companies that rate the quality of bonds, mainly use to make their rating decisions?"

                a.The time value of money

                b.Ratio analysis

                c.The cost of capital

Answer 1

1). Option (c) is correct. Money received today is worth more than money received in the future as it can be invested at a certain rate of return.

2). Present Value of $500 to be received 3 years from now = 500/(1+discount rate)^3 = 500/(1+10%)^3 = 500/(1.10)^3 Option (a) is correct.

3). Option (b) is correct. Leverage acts as a magnifier so it increases profits when investments make money but it also increases losses when investments lose money.

4). Option (c) is correct. Bonds are rated based on their expected return which includes the risk expectation.