Question 1

Time value of money refers to the idea that a specific amount of money

Accepted Answer

A) can be converted into other currencies in the foreign exchange market. 
B) is needed to purchase goods and services. 
C) is more valuable the sooner it is received. 
D) can buy less goods and services if inflation occurs over time. 
A) can be converted into other currencies in the foreign exchange market. 
B) is needed to purchase goods and services. 
C) is more valuable the sooner it is received. 
D) can buy less goods and services if inflation occurs over time.

Question 2

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Accepted Answer

A) higher returns. 
B) more likely outcomes. 
C) higher risks. 
D) smaller returns. 
A) higher returns. 
B) more likely outcomes. 
C) higher risks. 
D) smaller returns.

Question 3

Suppose that Clint wins a lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

Accepted Answer

A) Yes, but only if rapid inflation is expected over the next 30 years. 
B) Yes, but only if deflation is expected over the next 30 years. 
C) No, the rate of return will always be higher with the 30 annual payments. 
D) Yes, if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments. 
A) Yes, but only if rapid inflation is expected over the next 30 years. 
B) Yes, but only if deflation is expected over the next 30 years. 
C) No, the rate of return will always be higher with the 30 annual payments. 
D) Yes, if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments.

Question 4

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in five years.If the interest rate is 5 percent, then that asset will be worth $75 million today.

Accepted Answer

A) True 
 B)False

Question 5

The average expected rate of return on most financial assets is the sum of the rates that compensate for

Accepted Answer

A) nondiversifiable risk and time preference. 
B) diversifiable risk and time preference. 
C) nondiversifiable and diversifiable risk. 
D) nondiversifiable and diversifiable risk, and time preference. 
A) nondiversifiable risk and time preference. 
B) diversifiable risk and time preference. 
C) nondiversifiable and diversifiable risk. 
D) nondiversifiable and diversifiable risk, and time preference.

Question 6

Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at the end of the year for $390,000.Lucian's rate of return

Accepted Answer

A) is 2 percent. 
B) is 4.5 percent. 
C) is negative 2.5 percent. 
D) cannot be determined. 
A) is 2 percent. 
B) is 4.5 percent. 
C) is negative 2.5 percent. 
D) cannot be determined.

Question 7

Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000.What is Pigou's per-year rate of return?

Accepted Answer

A) 4.8 percent 
B) 9.8 percent 
C) 20 percent 
D) 39.2 percent 
A) 4.8 percent 
B) 9.8 percent 
C) 20 percent 
D) 39.2 percent

Question 8

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately

Accepted Answer

A) 1.3 percent. 
B) 2 percent. 
C) 5 percent. 
D) 20 percent. 
A) 1.3 percent. 
B) 2 percent. 
C) 5 percent. 
D) 20 percent.

Question 9

George buys an antique car for $20,000 and sells it five years later for just over $24,000.George's per-year rate of return is

Accepted Answer

A) 20 percent. 
B) 12 percent. 
C) 10 percent. 
D) 4 percent. 
A) 20 percent. 
B) 12 percent. 
C) 10 percent. 
D) 4 percent.

Question 10

Diversifiable risk refers to risk

Accepted Answer

A) faced by a portfolio in general. 
B) that can be reduced with appropriate fiscal and monetary policy. 
C) posed by business cycle fluctuations. 
D) specific to a particular investment. 
A) faced by a portfolio in general. 
B) that can be reduced with appropriate fiscal and monetary policy. 
C) posed by business cycle fluctuations. 
D) specific to a particular investment.

Question 11

The primary risk that bondholders face is that

Accepted Answer

A) the bond will reduce in price. 
B) the bond issuer will default. 
C) inflation will decrease. 
D) the rate of return will increase. 
A) the bond will reduce in price. 
B) the bond issuer will default. 
C) inflation will decrease. 
D) the rate of return will increase.

Question 12

Debt contracts (also called instruments) issued by government and corporations are known as

Accepted Answer

A) bonds. 
B) stocks. 
C) real assets. 
D) federally insured deposits. 
A) bonds. 
B) stocks. 
C) real assets. 
D) federally insured deposits.

Question 13

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Accepted Answer

A) 4.8 percent 
B) 5.2 percent 
C) 5.7 percent 
D) 6.2 percent 
A) 4.8 percent 
B) 5.2 percent 
C) 5.7 percent 
D) 6.2 percent

Question 14

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Accepted Answer

A) True 
 B)False

Question 15

Arbitrage causes all financial assets

Accepted Answer

A) of the same risk level to have the same price. 
B) to have the same expected rate of return. 
C) to have the same beta. 
D) of the same risk level to have the same average expected rate of return. 
A) of the same risk level to have the same price. 
B) to have the same expected rate of return. 
C) to have the same beta. 
D) of the same risk level to have the same average expected rate of return.

Question 16

The Security Market Line depicts the relationship between the

Accepted Answer

A) average expected rate of return on stocks and the average expected rate of return on bonds. 
B) average expected rate of return of a financial asset and the discount rate. 
C) risk level of a financial asset and the prime interest rate. 
D) average expected rate of return and risk level of a financial asset. 
A) average expected rate of return on stocks and the average expected rate of return on bonds. 
B) average expected rate of return of a financial asset and the discount rate. 
C) risk level of a financial asset and the prime interest rate. 
D) average expected rate of return and risk level of a financial asset.

Question 17

Another name for diversifiable risk is

Accepted Answer

A) systemic risk. 
B) inflation risk. 
C) idiosyncratic risk. 
D) cyclical risk. 
A) systemic risk. 
B) inflation risk. 
C) idiosyncratic risk. 
D) cyclical risk.

Question 18

Which of the following is common to all investments?

Accepted Answer

A) The investment pays interest. 
B) Some price must be paid to acquire them. 
C) Owners are guaranteed future payments. 
D) Government insurance backs them. 
A) The investment pays interest. 
B) Some price must be paid to acquire them. 
C) Owners are guaranteed future payments. 
D) Government insurance backs them.

Question 19

The so-called risk-free rate essentially measures the investors'

Accepted Answer

A) risk aversion. 
B) risk preference. 
C) time preference. 
D) expected rate of return. 
A) risk aversion. 
B) risk preference. 
C) time preference. 
D) expected rate of return.

Question 20

Other factors constant, if the interest rate is higher, the present value of a certain future amount will be smaller.

Accepted Answer

A) True 
 B)False

Exam 17: C: Financial Economics

Time value of money refers to the idea that a specific amount of money

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Suppose that Clint wins a lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in five years.If the interest rate is 5 percent, then that asset will be worth $75 million today.

The average expected rate of return on most financial assets is the sum of the rates that compensate for

Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at the end of the year for $390,000.Lucian's rate of return

Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000.What is Pigou's per-year rate of return?

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately

George buys an antique car for $20,000 and sells it five years later for just over $24,000.George's per-year rate of return is

Diversifiable risk refers to risk

The primary risk that bondholders face is that

Debt contracts (also called instruments) issued by government and corporations are known as

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Arbitrage causes all financial assets

The Security Market Line depicts the relationship between the

Another name for diversifiable risk is

Which of the following is common to all investments?

The so-called risk-free rate essentially measures the investors'

Other factors constant, if the interest rate is higher, the present value of a certain future amount will be smaller.

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

Filters