Reading 5: The Time Value of Money-LOS a习题精选 interest, research, discount, div, class

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Session 2: Quantitative Methods: Basic Concepts
Reading 5: The Time Value of Money

LOS a: Interpret interest rates as required rate of return, discount rate, or opportunity cost.

 

 

 

Vega research has been conducting investor polls for Third State Bank. They have found the most investors are not willing to tie up their money in a 1-year (2-year) CD unless they receive at least 1.0% (1.5%) more than they would on an ordinary savings account. If the savings account rate is 3%, and the bank wants to raise funds with 2-year CDs, the yield must be at least:

A) 4.0%, and this represents a required rate of return.

B) 4.5%, and this represents a required rate of return.

C) 4.5%, and this represents a discount rate.

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Since we are taking the view of the minimum amount required to induce investors to lend funds to the bank, this is best described as a required rate of return. Based upon the numerical information, the rate must be 4.5% (= 3.0 + 1.5).

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Selmer Jones has just inherited some money and wants to set some of it aside for a vacation in Hawaii one year from today. His bank will pay him 5% interest on any funds he deposits. In order to determine how much of the money must be set aside and held for the trip, he should use the 5% as a:

A) discount rate.

B) required rate of return.

C) opportunity cost.

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He needs to figure out how much the trip will cost in one year, and use the 5% as a discount rate to convert the future cost to a present value. Thus, in this context the rate is best viewed as a discount rate.

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Wei Zhang has funds on deposit with Iron Range bank. The funds are currently earning 6% interest. If he withdraws $15,000 to purchase an automobile, the 6% interest rate can be best thought of as a(n):

A) financing cost.

B) discount rate.

C) opportunity cost.

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Since Wei will be foregoing interest on the withdrawn funds, the 6% interest can be best characterized as an opportunity cost — the return he foregoes by postponing his auto purchase until the future.