Understanding Interest Rates Quiz

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

• present value

• future value

• interest

• deflation

The present value of an expected future payment ________ as the interest rate increases.

• falls

• rises

• is constant

• is unaffected

An increase in the time to the promised future payment ________ the present value of the payment.

• decreases

• increases

• has no effect on

• is irrelevant to

With an interest rate of 6 percent, the present value of $100 next year is approximately

• $106.

• $100.

• $94.

• $92.

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is

• 5 percent.

• 10 percent.

• 12.5 percent.

• 15 percent.

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

• face value.

• par value.

• deflation.

• discounting the future.

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

• simple loan.

• fixed-payment loan.

• coupon bond.

• discount bond.

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

• simple loan.

• fixed-payment loan.

• coupon bond.

• discount bond.

Which of the following are true of fixed payment loans?

• The borrower repays both the principal and interest at the maturity date.

• Installment loans and mortgages are frequently of the fixed payment type.

• The borrower pays interest periodically and the principal at the maturity date.

• Commercial loans to businesses are often of this type.

A fully amortized loan is another name for

• a simple loan.

• a fixed-payment loan.

• a commercial loan.

• an unsecured loan.