Question

16. In a world without risk or inflation, the real interest rate reflects

A) the degree of risk.

B) differing time patterns of individuals' consumption preferences.

C) economic growth.

D) qualifications of borrowers.

14. The present value of a series of future payments is

A) inversely related to the future value.

B) unrelated to the discount factor.

C) directly related to the market interest rate.

D) inversely related to the discount factor.

10. Which of the following payment terms should a professional athlete prefer in a “ten million dollar” five-year contract if

      the athlete wants to obtain the greatest present value of income?

A) Receive $2 million each of the next five years.

B) Receive $6 million next year and then receive $1 million in each of the subsequent four years.

9. Interest-rate risk can best be characterized as the risk that

A) you could have earned a higher interest rate if you waited to purchase a bond.

B) fluctuations in the price of a financial asset in response to changes in market interest rates.

C) you could have gotten a lower interest rate if you waited to lock in a mortgage.

D) short-term interest rates may exceed long-term interest rates.

C) Receive $1 million in each of the next four years and then receive $6 million in the subsequent year.

D) All of the above have the same present value of income.

Answer 1

16. B) Differing time patterns of individuals consumer preferences.

Since the assumption is of no risk and inflation, the real interest rate would reflect the differing time patterns of individuals consumer preferences i.e. for how much future consumption the consumers are willing to forego present consumption.

14. D) Inversely related to the discount factor. Assuming a constant series of future payments, the higher the discount rate, the lower will be the present value of the payments. (Discount factor = 1/(1+r)^t is multiplied to a the future payments where r is the discount rate and t the number of years, higher the discount rate, lower will be the discount factor and lower the present value of the series of payments)

15. B) Assuming the discount rate is > 0 The present value is maximum in receiving 6 million next year and 1 million in each of 4 subsequent years compared to the other options.

Since in total 10 million is received, present value is highest when majority of money received is sooner

9. B) Fluctuations in the price of a financial asset in response to changes in market interest rates.

Interest rate risk can be best characterized by the unexpected fluctuations in the value of fixed-income bonds. (Bond value can fall if the interest rate typically rises, for example if you have a 100$ bond that pays a fixed 5$ every year which is 5% interest rate, if the market interest becomes 10%, the value of your bond will become 50$ because it pays 5$)

Hope it's clear. Do ask for any clarifications if requireed.