Chapter 27 (A)

1. The field of finance studies how

• A.society manages its scarce resources.
• B.people make decisions regarding resource allocation over time and how to handle risk
• C. people decide whether or not to become risk averse.
• D.society can reduce aggregate risk.

31. Which of the following is the correct way to figure the future value of $X that earns r percent for N years?

• A.$X(1 + rN) mũ N
• B.$X(1 + r) mũ N
• C. $X(1 + rN)
• D.$X(1 + r/N) mũ N

63. What is the present value of a payment of $100 to be made one year from today?

• A.$100*(1 + r)
• B.$100/(1 + r)
• C. $100 – $100 x r
• D.$100 – (1 + r)/$100

69. The present value of a payment to be made in the future is lower at

• A.higher interest rates and as the time until the payment is made increases.
• B.higher interest rates and as the time until the payment is made decreases.
• C. lower interest rates and as the time until the payment is made increases.
• D.lower interest rates and as the time until the payment is made decreases.

70. You are expecting to receive $650 at some time in the future. Which of the following would decrease the present value of this future payment?

• A.Interest rates rise and you get the payment sooner.
• B.Interest rates rise and you have to wait longer for the payment.
• C. Interest rates fall and you get the payment sooner.
• D.Interest rates fall and you have to wait longer to get the payment.

71. You are expecting to receive $750 at some time in the future. Which of the following would increase the present value of this future payment?

• A.Interest rates rise and you get the payment sooner.
• B.Interest rates rise and you have to wait longer for the payment.
• C. Interest rates fall and you get the payment sooner.
• D.Interest rates fall and you have to wait longer to get the payment.

85. Pat was given two choices when the interest rate was 6 percent. In each case she was supposed to choose the option with the highest present value. In option 1 Pat chose $200 today over $215 a year from today. In option 2 Pat chose $400 today over $420 a year from today. Which of the following is correct?

• A.Pat made the right choice in both cases.
• B.Pat made the right choice in the first case only.
• C. Pat made the right choice in the second case only.
• D.Pat made the wrong choice in both cases.

86. Art was given two choices when the interest rate was 3 percent. In each case he was supposed to choose the option with the highest present value. In option 1 Art chose $50 today over $51 a year from today. In option 2 Art chose $250 today over $260 a year from today. Which of the following is correct?

• A.Art made the right choice in both cases.
• B.Art made the right choice only in the first case.
• C. Art made the right choice only in the second case.
• D.Art made the wrong choice in both cases.

87. HydroGrow is considering building a new building in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

• A.falls, and so Hydro Grow is less likely to build the building.
• B.falls, and so HydroGrow is more likely to build the building.
• C. rise, and so HydroGrow is less likely to build the building.
• D.rise, and so HydroGrow is more likely to build the building.

89. A fall in the rate of interest will

• A.reduce investment primarily because it will reduce the present value of future revenues expected from investment projects.
• B.reduce investment primarily because it will increase the present value of current construction costs.
• C. increase investment primarily because it will increase the present value of future revenues expected from investment projects.
• D.increase investment primarily because it will reduce the present value of current construction costs.