Question

(     ) 1. According to present value (PV) formula, which one of the following changes will increase the present value when everything else stays the same?

            A)        Future value (FV) decrease.

            B)        Period discount rate (r) decrease.

            C)        Number of periods in discounting (t) increase.

            D)        None of the above.

(     ) 2. You deposit $100 today into your savings account and you will continue this annual $100 deposit activity for the next 29 years without withdrawing money from the account. What do we name this type of cash flows if we want to calculate the total PV of today?

            A)        Single cash flow.

            B)        Annuity.

            C)        Annuity due.

            D)        Perpetuity.

(     ) 3. The stock market has been strong recently. The stock you bought one month ago at $100 was sold at $105 today. Which one of the following is a correct statement about your investment?

            A)        The holding period return rate (HPR) of the investment is about 105%.

            B)        The annual percentage rate (APR) of the investment is about 5%.

            C)        The annual percentage yield (APY) of the investment is about 60%.

            D)        The effective annual rate (EAR) of the investment is 80%.

(     ) 4. In year 2017, the real interest rate, inflation rate, and nominal interest rate were 2%, 3%, and 5.06% respectively. Which one of the following statement is correct accordingly?

            A)        The price level of the entire economy increased by 3%.

            B)        The price level of the entire economy increased by 2%.

            C)        Saving money in C.D. account increased your purchasing power by 3%.

            D)        Saving money in C.D. account increased your account balance dollar amount by 2%.

(     ) 5. Last year your C.D. account provided you 2% return rate, while your corporate bond investments provided you 6% return rate. Which one of the following statement is correct?

            A)        The risk free rate is 4%.

            B)        The risk premium of bond investment is 8%.

            C)        The risk premium of bond investment is 4%.

            D)        The risk free rate is 6%.

Answer 1

1)

B)        Period discount rate (r) decrease.

as lower the discount rate higher will be PV

2)

C)        Annuity due.

because payment is periodic which means annuity and beginning payment means annuity due.

3)

monthly rate=105/100-1=5%

EAR=(1+5%)^12-1=80%

D)        The effective annual rate (EAR) of the investment is 80%.

4)

A)        The price level of the entire economy increased by 3%.

As price levels are denoted by inflation rate

5)

C)        The risk premium of bond investment is 4%.

the above are answer