Archive for the ‘critical thinking’ Category

Real World Graduation, Question 44: Bond Commissions

RealWorldGraduation_Question_44_Bond_Commissions   <– PDF

Suppose Christine has $1000 to invest for one year only (she will cash out after 12 months), and is only interested in conservative investments such as mutual funds based on high-quality bonds that have a guaranteed annual return. She is presented with three options: a) Bond Fund A with a guaranteed return of 3% and no sales commission; b) Bond Fund B with a guaranteed return of 6% and a sales commission of 3%; and c) Bond Fund C with a guaranteed return of 10% and a sales commission of 7%.  Assume that the risk of all three options is zero.  Sales commissions are always paid up-front.  Choose the correct statement for this one-year investment:

a) Bond Fund B is twice as good an investment as Bond Fund A (6/3 = 200%)

b) Bond Fund C is 166% better as an investment than Bond Fund B (10/6 = 166%).

c) Bond Fund C is 333% better as an investment as Bond Fund A (10/3 = 333%)

d) Bond Fund C is a better investment than splitting the $1000 between Fund A and Fund B in any ratio.

e) All of the above are true.

(The answer is shown on p. 2 of the PDF.)

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Real World Graduation, Question 43: Gold Coins

RealWorldGraduation_Question_43_Gold_Coins   <– PDF

Gold has historically been recognized as the ultimate “safe” money because it never loses its value. On the other hand, many paper currencies throughout history have eventually become worthless.  Some noteworthy examples are Continental dollar issued by Congress during the American Revolution (1777-1781), the German mark in 1923, the Yugoslav dinar in 1994, and the Zimbabwean dollar in 2008.  Many people choose to hedge against paper currencies by purchasing gold coins as a form of insurance, which could be sold or bartered in the event the paper currency ever fails.  Many types are offered for sale as follows:

a) Authentic Gauden’s $20 Double Eagles (originally issued between 1908 and 1929). A total of approximately 65,000,000 were originally minted.  It is 34 mm in diameter, and contains 42.0 milligrams (mg) of pure gold.  Each can be purchased for $ 29.95 US.

b) Tribute proof $10 Liberty Head Eagles (originally issued between 1866 and 1907). Approximately 64,000,000 total were minted.  It is 27 mm in diameter, and contains 21 mg of pure gold.  Each can be purchased for $ 19.95 US.

c) 24 carat gold clad $10 Indian Head Eagles (originally issued between 1908 and 1933). Approximately 15,000,000 total were minted. It is 27 mm in diameter, and contains 19 mg of pure gold.  Each can be purchased for $ 19.95 US.

d) Private mint authorized $5 Indian Head Half Eagles (originally issued intermittently between 1908 and 1929). Approximately 14,000,000 total were minted.  It is 21.6 mm in diameter, and contains 8.5 mg of pure gold.  Each can be purchased for $ 9.99 US.

A famous company advertises these coins for sale on TV, radio, and newspaper ads, reminding the audience that these coins are rare and out of circulation, and that gold is always highly sought after both for its intrinsic value and in the form of beautiful old coins. The ad goes on to remind the audience that gold coins should be part of every investment portfolio.  Which of these coins offers the best investment value?

a) The Double Eagle, because it is the largest physical coin and has the second-largest amount of pure gold.

b) The Liberty Head, because it contain the greatest amount of pure gold.

c) The Indian Head Eagle, because it has the lowest price and is still pure gold.

d) The Half Eagle, because it is the rarest one (fewest were minted), which makes it more valuable.

e) It is best to have a variety of these coins as an investment. The prudent investor, or person who wants some insurance against a currency collapse, would be wise to buy some of each, but not necessarily in equal amounts.  This is important to diversify one’s gold investments, even more so than stocks and bonds.

The additional information required to determine the best investment value is as follows:

  1. The current price of gold is about $120 per troy ounce.
  2. There are 31.103 grams per troy ounce, and 1000 mg per gram.

(The answer is shown on p. 2 of the PDF.)

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Real World Graduation: Question 42: Political Promises

RealWorldGraduation_Question_42_Political_Promises   <– PDF

During the Presidential election campaign of 1988, George H. W. Bush stated, “Read my lips, no new taxes”.   He was subsequently elected as the 41st President of the U. S.  What did this statement mean regarding his intended tax policy as President?

a) He would never raise income taxes if elected President.

b) Since he said “read my lips”, the statement was directed only at deaf people; so he meant that he would not raise income taxes on deaf people.

c) “No new taxes” means he would not create any new category of taxes.

d) Every tax must be paid every year, therefore all taxes are “new”; thus this statement means he was going to eliminate all federal taxes.

e) A combination of a) and c).

(The answer is on p. 2 of the PDF.)

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Real World Graduation, Question 41: US Currency

RealWorldGraduation_Question_41_US_Currency   <– PDF

The basic currency unit of the United States is called the dollar.  The word “dollar” is a modification of the word “taler”, which is a nickname for “thaler”, which was the name of a coin minted by the Dutch which contained one ounce of 0.999 pure silver.  Therefore, a dollar was originally devised in 1786 to designate a coin containing 375.64 grains of pure silver.  There are 480 grains in a troy ounce, so the dollar consisted 0.7825 troy ounces of silver.  There are 31.103 grams per troy ounce, and therefore the dollar was 24.3406 grams of pure silver.  Silver was traditionally regarded as 1/15th the value of gold, hence the dollar, although defined in silver, was equivalent to 1.622 grains of gold.

In 1834, the U. S. government decided to reduce the weight of gold in the gold coinage, so it altered the value of silver to be 1/16th of the value of gold, thus one dollar was devalued to 1.521 grams of gold.  This put the dollar implicitly on a gold standard, although coins of both types circulated (and the dollar remained at 0.7825 ounces of silver).

In 1900, the dollar was formally converted to a gold standard, in which one dollar was worth 23.195 grains (which is 0.0483 troy ounces or 1.503 grams) of pure gold. The dollar was thus valued at 20.694 dollars per troy ounce.

In 1934, the dollar was devalued to $35 dollars per troy ounce of gold (13.71 grains or 0.02857 troy ounces or 0.8886 grams).

In modern times, dollars are issued as paper Federal Reserve Notes by a consortium of private banks acting as a central bank, called the Federal Reserve Bank. The dollar is backed by the “full faith and credit of the United States Government”.  Therefore, the paper dollar, while itself is nothing more than paper and ink, is simply a representation of real value.  How is the “full faith and credit of the United States Government” manifested when redeeming the paper dollars (in other words, for what things of value may paper dollars be exchanged at any Federal Reserve Bank)?

a) Gold, at the rate of 1/16th troy ounce per dollar

b) Silver, at the rate of 0.7825 troy ounces per dollar

c) Stock in the Federal Reserve banks

d) Land held in trust by the Government, mostly in the western states

e) The citizen may choose either gold at 0.02857 ounces per dollar per the 1934 gold standard, or silver at 0.7825 ounces per dollar per the revised 1834 silver standard.

(See the answer on p. 2 of the PDF.)

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