Exam 17: C: Financial Economics

^{Joseph is considering purchasing a condo. He has the option of buying one in Midtown with a present value of $150,000 or one in downtown with a future value of $200,000. If the current market interest rate is 5 percent and he wants to buy the home with the highest future value in 5 years, he should} buy the condo in downtown.

The Security Market line (SML) shows how the average expected rates of return on assets vary with

During the financial crisis of 2007-2008, investors demanded much higher risk premiums in their investments.This caused the SML to

Which of the following is a popular type of investment?

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Riskier investments tend to sell for

Other factors constant, the present value will be larger,

Assume that two firms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock.Arbitrage will occur as investors

(Advanced analysis) Susie has $500 invested in a financial asset earning an annually compounded interest rate of 8 percent.If Susie plans to cash in the asset when it is worth $700, about how long will she have to wait?

Refer to the graph.Each labeled point represents a different asset.For which of these assets would we not expect arbitrage to change the average expected rate of return?

Which of the following is a difference between stocks and bonds?

Hermione is considering an investment that has a ¾ chance of paying a 10 percent rate of return and a ¼ chance of paying 2 percent.What is the average expected rate of return on the investment?

Alyssa is saving money for a vacation she wants to take five years from now.If the trip will cost $1,000 and she puts her money into a savings account paying 4 percent interest, compounded annually, how much would Alyssa need to deposit today to reach her goal without making further deposits?

^{Roger has the opportunity to invest $100,000 in two different assets. The investment in Asset #1 will have a present value of $120,000. The investment in Asset #2 is expected to have a future value of $140,000 in four years. If the market interest rate is 5 percent a year, which one would be the better} investment?

The present value of a stream of lottery payments is less than the size of the stated jackpot.

Bankruptcy of a firm means that it

What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?

An expansionary monetary policy will shift the Security Market Line down.

A bank makes an auto loan for $10,000 at an annual rate of 6 percent.Assuming no repayment is made during the period, after two years the borrower will owe

Index funds