Question 1

Limited liability rules

Accepted Answer

A) mean that bankrupt companies owe nothing to corporate bondholders. 
B) discourage investment in corporate stock. 
C) help prevent corporate fraud. 
D) encourage stock investing by limiting shareholder risk of loss. 
A) mean that bankrupt companies owe nothing to corporate bondholders. 
B) discourage investment in corporate stock. 
C) help prevent corporate fraud. 
D) encourage stock investing by limiting shareholder risk of loss.

Question 2

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Accepted Answer

A) 8.75 percent 
B) 9.1 percent 
C) 10 percent 
D) 10.4 percent 
A) 8.75 percent 
B) 9.1 percent 
C) 10 percent 
D) 10.4 percent

Question 3

Average expected rates of return and levels of risk are positively related.

Accepted Answer

A) True 
 B)False

Question 4

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Accepted Answer

A) True 
 B)False

Question 5

Investment risks vary across different countries.The International Country Risk Guide in 2015 ranked which of the following countries to have the least composite risk?

Accepted Answer

A) Switzerland 
B) China 
C) United States 
D) India 
A) Switzerland 
B) China 
C) United States 
D) India

Question 6

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Accepted Answer

A) remain unchanged, as the house price and the rate of return are independent of each other. 
B) be 13.6 percent. 
C) fall from 9 percent to 8 percent. 
D) fall from 10.9 percent to 9.6 percent. 
A) remain unchanged, as the house price and the rate of return are independent of each other. 
B) be 13.6 percent. 
C) fall from 9 percent to 8 percent. 
D) fall from 10.9 percent to 9.6 percent.

Question 7

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

Accepted Answer

A) True 
 B)False

Question 8

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.When the CD matures in 10 years, you will get more than $9,000 from it.

Accepted Answer

A) True 
 B)False

Question 9

The price of an asset should

Accepted Answer

A) exactly equal the total present value of all of the asset's future payments. 
B) exactly equal the total future value of all of the asset's future payments. 
C) approximately equal X(1 + i)t, where X is the value of the asset, i is the interest rate, and t is the number of years. 
D) exactly equal the total present and future value of all of the asset's future payments. 
A) exactly equal the total present value of all of the asset's future payments. 
B) exactly equal the total future value of all of the asset's future payments. 
C) approximately equal X(1 + i)t, where X is the value of the asset, i is the interest rate, and t is the number of years. 
D) exactly equal the total present and future value of all of the asset's future payments.

Question 10

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000.Thea's per-year rate of return is

Accepted Answer

A) 4.8 percent. 
B) 14.8 percent. 
C) 20 percent. 
D) 29.6 percent. 
A) 4.8 percent. 
B) 14.8 percent. 
C) 20 percent. 
D) 29.6 percent.

Question 11

If an investment is equally likely to return 10 percent per year or 15 percent a year, then its average expected rate of return is

Accepted Answer

A) 10.5 percent. 
B) 11.0 percent. 
C) 11.5 percent. 
D) 12.5 percent. 
A) 10.5 percent. 
B) 11.0 percent. 
C) 11.5 percent. 
D) 12.5 percent.

Question 12

An asset's price and rate of return

Accepted Answer

A) are independent of each other. 
B) can be either inversely or directly related. 
C) are inversely related. 
D) are directly related. 
A) are independent of each other. 
B) can be either inversely or directly related. 
C) are inversely related. 
D) are directly related.

Question 13

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Accepted Answer

A) True 
 B)False

Question 14

(Last Word) Passively managed funds produce higher rates of return for investors than actively managed funds because

Accepted Answer

A) trading and management costs are higher with actively managed funds. 
B) passively managed funds invest in riskier assets that have higher rates of return. 
C) actively managed funds invest in riskier assets that have not reached expected rates of return. 
D) actively managed funds are taxed, while passively managed funds are not taxable. 
A) trading and management costs are higher with actively managed funds. 
B) passively managed funds invest in riskier assets that have higher rates of return. 
C) actively managed funds invest in riskier assets that have not reached expected rates of return. 
D) actively managed funds are taxed, while passively managed funds are not taxable.

Question 15

A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200.If the bond were sold today, what would be the present value of the bond?

Accepted Answer

A) $200 
B) $157 
C) $150 
D) $145 
A) $200 
B) $157 
C) $150 
D) $145

Question 16

Arbitrage equalizes rates of return across similar investments because

Accepted Answer

A) arbitrage also equalizes the prices of the assets. 
B) investors prefer diversity. 
C) investors will want to replace lower rate of return assets with those generating higher rates of return. 
D) investors will want to replace higher rate of return assets with those generating lower rates of return. 
A) arbitrage also equalizes the prices of the assets. 
B) investors prefer diversity. 
C) investors will want to replace lower rate of return assets with those generating higher rates of return. 
D) investors will want to replace higher rate of return assets with those generating lower rates of return.

Question 17

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Accepted Answer

A) True 
 B)False

Question 18

Arbitrage equalizes rates of return across assets of a given beta.

Accepted Answer

A) True 
 B)False

Question 19

The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a two-year contract but, because of salary cap limitations, can only pay $8 million for the first year (Alex's market value is $10 million per year). The Hazards offer to pay $8 million in year 1 and $13 million in year 2. Should Alex sign the contract?

Accepted Answer

A) Yes, Alex is better off financially regardless of the interest rate. 
B) Yes, if the interest rate is less than 50 percent. 
C) Yes, but only if the team expects to be successful. 
D) Yes, but only if the interest rate is less than 10 percent. 
A) Yes, Alex is better off financially regardless of the interest rate. 
B) Yes, if the interest rate is less than 50 percent. 
C) Yes, but only if the team expects to be successful. 
D) Yes, but only if the interest rate is less than 10 percent.

Question 20

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Accepted Answer

A) True 
 B)False

Exam 17: C: Financial Economics

Limited liability rules

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Average expected rates of return and levels of risk are positively related.

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Investment risks vary across different countries.The International Country Risk Guide in 2015 ranked which of the following countries to have the least composite risk?

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.When the CD matures in 10 years, you will get more than $9,000 from it.

The price of an asset should

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000.Thea's per-year rate of return is

If an investment is equally likely to return 10 percent per year or 15 percent a year, then its average expected rate of return is

An asset's price and rate of return

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

(Last Word) Passively managed funds produce higher rates of return for investors than actively managed funds because

A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200.If the bond were sold today, what would be the present value of the bond?

Arbitrage equalizes rates of return across similar investments because

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Arbitrage equalizes rates of return across assets of a given beta.

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

B: Limits, Alternatives, and Choices

A: - Limits, Alternatives, and Choices

B: The Market System and the Circular Flow

A: - The Market System and the Circular Flow

B: Demand, Supply, and Market Equilibrium

A: - Demand, Supply, and Market Equilibrium

B: Market Failures: Public Goods and Externalities

A: - Market Failures: Public Goods and Externalities

B: Governments Role and Government Failure

A: Governments Role and Government Failure

B: an Introduction to Macroeconomics

A: an Introduction to Macroeconomics

B: Measuring the Economys Output

A: Measuring the Economys Output

B: Economic Growth

A: Economic Growth

B: Business Cycles, Unemployment, and Inflation

A: Business Cycles, Unemployment, and Inflation

B: Basic Macroeconomic Relationships

A: Basic Macroeconomic Relationships

B: The Aggregate Expenditures Model

A: The Aggregate Expenditures Model

B: Aggregate Demand and Aggregate Supply

A: Aggregate Demand and Aggregate Supply

B: Fiscal Policy, Deficits, Surpluses, and Debt

A: Fiscal Policy, Deficits, Surpluses, and Debt

B: Money, Banking, and Money Creation

A: Money, Banking, and Money Creation

B: Interest Rates and Monetary Policy

A: Interest Rates and Monetary Policy

A: Long-Run Macroeconomic Adjustments

B: Long-Run Macroeconomic Adjustments

A: International Trade

B: International Trade

A: The Balance of Payments and Exchange Rates

B: The Balance of Payments and Exchange Rates

The Economics of Developing Countries

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