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QUIZ 1

# QUIZ 1 - Question 1 2 out of 2 points The time it would...

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Question 1 2 out of 2 points The time it would take for money to double at a simple interest rate of 5% per year is closest to Answer Selected Answer: 20 years Correct Answer: 20 years Response Feedback: 2P = P + P(0.05)(n) n = 20 Question 2 2 out of 2 points If the annual interest rate is 23 percent, then the one year discount factor is equal to... (Accuracy for this question is set at the third decimal point.) Answer

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Selected Answer: 0.813 Correct Answer: 0.813 ± 0.003 Response Feedback: As discussed in class, given i is the interest rate (also known as the "discount rate"), the (one-period) discount factor is given by δ = 1/(1+i). Question 3 2 out of 2 points If Mary lends 21.3 million dollars to John today and in return John pays her back 33.26 million dollars one month later, what is the interest rate per month that John will pay to Mary? (Please state your answer using decimals, that is, if i=5.3%, the answer will be 0.053. Accuracy is set at the third decimal for this question.) Answer
Selected Answer: 0.562 Correct Answer: 0.562 ± 0.005 Response Feedback: Let a = amount Mary lends (principal) b = amount John pays back after 1 month Then i = (b-a)/a. Question 4 2 out of 2 points Certain certificates of deposit accumulate interest at 3.3 % per year simple interest. If a company invests P dollars now in these certificates for the sole purpose of purchasing of a new machine whose price will be 897 dollars 21 years from now, what should the deposit be? (Accuracy for this question is set at the second decimal.) Answer

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Selected Answer: 529.83 Correct Answer: 529.83 ± 0.05 Response Feedback: Let P = deposit amount. After n periods with simple interest, it will accumulate to F=P(1+n*i). Since we want F to be exactly equal to the price of the machine, we must deposit P = F/(1+n i). Question 5 2 out of 2 points Trucking giant Yellow Corp agreed to purchase rival Roadway for \$ 101.97 million in order to reduce so-called back-office costs (e.g., payroll and insurance) by \$33.45 million per year. If the savings were realized as planned, what would be the annual rate of return on the investment? (Please state your answer using
decimals, that is, if i=5.3%, the answer will be 0.053. Accuracy is set at the third decimal for this question.) Answer Selected Answer: 0.328 Correct Answer: 0.328 ± 0.003

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Response Feedback: Let P = amount paid for
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