Multiple Choice:
1.
If an asset entitles its owner to a payment of $100 at the end of one year, and to $200 at the end
of a second year, and nothing after that, and the interest rate is ten percent (that is, 0.10), what is
the present discounted value of the asset?
a.
$300
b.
$\frac{100}{0.10} + \frac{200}{(0.10)(0.10)}$
c.
$\frac{100}{0.10}$
d.
Approximately $256.
e.
None of the above.
2.
If a financial asset will pay $100 in interest at the end of each year, forever, and the market
interest rate is always 5 percent, what is the present value of that asset?
a.
$500.
b.
$\frac{100}{(1.05)}$.
c.
$2,000.
d.
$5,000.
e.
$50,000.
f.
$20,000
g.
None of the above
3.
Other things equal, when market interest rates rise:
a.
Bond prices tend to fall.
b.
Bond prices tend to rise.
c.
It must mean that the money supply has been increased.
d.
It must mean that the Fed has bought bonds.
