Question

PARTI: MULTIPLE CHOICE-Choose the letter of the most correct answer for each question. Record only one answer per question. 1. Which following statement is true, assuming an interest rate of greater than 0% a. The present value of a dollar to be received one year from today is ALWAYS worth more than one dollar. b. The present value of a dollar to be received one year from today is ALWAYS worth less than one dollar. c. The present value of a dollar to be received one year from today is ALWAYS equal to one dollar. d. None of the answers listed above is correct (in particular, the word ALWAYS in the answers negates any one of them from being strictly correct). e. All of the answers listed above (even answer d) are incorrect. Which one of the following investments provides the highest effective annual rate of retum (i.c., which of the following investments is the BEST the largest EAR) over an investing horizon of 10 years)? a. An investment which has a 3.0 percent nominal rate with annual compounding, b. An investment which has a 2.98 percent nominal rate with semi-annual compounding c. An investment which has a 2.965 percent nominal rate with quarterly compounding. d. An investment which has a 2.9575 percent nominal rate with monthly compounding. e. An investment which has a 2.955 percent nominal rate and daily (365) compounding. 3. For a given nominal interest rate greater than 0%, if the number of compoundsg periods per year decreases (for example, from monthly to quarterly), the present value of S1000 to be received exactly 10 years from today will: a. increase. b. decrease. c. remain unchanged. d. either increase or decrease, depending on the nominal interest rate.

Answer 1

1. If an interest rate will be greater than 0%, the dollar value one year from today will always be less than what is it today. For example $110, if the interest rate is 10% will be worth $110/1.1 = $100 one year from today.

Hence, the answer is option b.

2. The following equation solves the problem
(1 + i ) = ( 1 + 2.98/200)^2
Therefore, i =[(1 + 2.98/200)^2] - 1
i = 3.0022%

Hence, the answer is b

3. If the number of compound periods per year decreases( monthly to quarterly) the present value of $1,000 to be received exactly 10 years from today because the amount earned by compounding decrease because no. of periods lessen. For example, earlier monthly for 10 years, no. Of periods= 12*10 = 120 periods and number of periodsc to quarterly = 12*4 = 48 periods. Hence, the amount decreased.

The answer of the question is option b.