If an investor prefers the present value of an investment to its future value a.
ID: 2615128 • Letter: I
Question
If an investor prefers the present value of an investment to its future value
a. he has selected an interest rate that is too high.
b. he has selected an interest rate that is too low.
c. he has a zero time value of money.
d. none of the above
Effective annual rates decrease as ____ decrease:
a. annual percentage rates
b. number of compounding periods
c. quoted rates
d. All of the above
A hundred dollars deposited in a bank will reach the largest future value if the bank pays _____ interest of _____ percent.
a. simple, 5
b. simple, 6
c. compound, 5
d. compound, 6
a. he has selected an interest rate that is too high.
b. he has selected an interest rate that is too low.
c. he has a zero time value of money.
d. none of the above
Effective annual rates decrease as ____ decrease:
a. annual percentage rates
b. number of compounding periods
c. quoted rates
d. All of the above
A hundred dollars deposited in a bank will reach the largest future value if the bank pays _____ interest of _____ percent.
a. simple, 5
b. simple, 6
c. compound, 5
d. compound, 6
Explanation / Answer
Solution 1:
Correct option is > b. he has selected an interest rate that is too low
Reason: The future value would be less attractive the when interest rates are too low. For an example if project IRR doesn’t exceed the cost of the capital then entity chooses not to invest in project and keep present value in hand or intact with them.
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Solution 2:
Correct option is > d. All of the above
Reason: EAR is dependent on annual percentage rate, number of compounding periods and quoted rates. EAR is output of all of the three.
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Solution 3:
Correct option is > d. Compound, 6
Reason: The future value is higher if we select compounded rate and higher rate of interest hence option d. suits our purpose.