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Click on each question to check your answer.
1. Why is the value of money today worth more than the money in the future given that the price level is stable?
Today’s money is the most liquid asset while the future money forgoes this opportunity. (p. 69)
2. Compare nominal interest rate with effective interest rate.
The effective interest rate and nominal interest rate are identical if the compounding period is one. Nominal interest rate is lower than compounding interest rate if compounding happens frequently. (p. 81)
3. Why should you consider saving earlier than later?
It is because the power of compounding: interest earned becomes principal earning more interest. (p. 70)
4. Would the price of bonds go up or go down if the interest rate is up? Explain briefly.
The price of bonds would go down because the opportunity rate has gone up. (p. 69)
5. Under what condition should you be indifferent to the present sum of money to the future sum of money?
When the present sum of money is equivalent to the future sum of money. (p. 73)