Question 1

Which of the following is the largest?

Accepted Answer

A) the future value of $250 with 3% interest for 2 years 
B) the future value of $250 at 2% interest for 3 years 
C) the present value of $250 to be paid in two years when the interest rate is 3% 
D) the present value of $250 to be paid in three years when the interest rate is 2% 
A) the future value of $250 with 3% interest for 2 years 
B) the future value of $250 at 2% interest for 3 years 
C) the present value of $250 to be paid in two years when the interest rate is 3% 
D) the present value of $250 to be paid in three years when the interest rate is 2%

Question 2

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Accepted Answer

A) $485.44. 
B) $496.50. 
C) $509.28. 
D) $515.00. 
A) $485.44. 
B) $496.50. 
C) $509.28. 
D) $515.00.

Question 3

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?

Accepted Answer

A) 7 percent 
B) 8 percent 
C) 9 percent 
D) 10 percent 
A) 7 percent 
B) 8 percent 
C) 9 percent 
D) 10 percent

Question 4

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Accepted Answer

A) $210 
B) $220 
C) $240 
D) $250 
A) $210 
B) $220 
C) $240 
D) $250

Question 5

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Accepted Answer

A) This stock is overvalued; you should consider adding it to your portfolio. 
B) This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued; you should consider adding it to your portfolio. 
D) This stock is undervalued; you shouldn't consider adding it to your portfolio. 
A) This stock is overvalued; you should consider adding it to your portfolio. 
B) This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued; you should consider adding it to your portfolio. 
D) This stock is undervalued; you shouldn't consider adding it to your portfolio.

Question 6

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A) Stock prices should follow a random walk. 
B) Index funds should typically outperform highly managed funds. 
C) News has no effect on stock prices. 
D) There is little point in spending many hours studying the business pages looking for undervalued stocks. 
A) Stock prices should follow a random walk. 
B) Index funds should typically outperform highly managed funds. 
C) News has no effect on stock prices. 
D) There is little point in spending many hours studying the business pages looking for undervalued stocks.

Question 7

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Accepted Answer

A) If it is "heads," she wins $100; if it is tails, she loses $95. 
B) If it is "heads," she wins $150; if it is tails, she loses $150. 
C) If it is "heads," she wins $150; if it is tails, she loses $140. 
D) She definitely would not accept any of these bets. 
A) If it is "heads," she wins $100; if it is tails, she loses $95. 
B) If it is "heads," she wins $150; if it is tails, she loses $150. 
C) If it is "heads," she wins $150; if it is tails, she loses $140. 
D) She definitely would not accept any of these bets.

Question 8

List two ways a risk adverse person may attempt to reduce risks.

Accepted Answer

buy insurance
divers

Question 9

An asset market is said to experience a speculative bubble when

Accepted Answer

A) the price of the asset rises above what appears to be its fundamental value. 
B) the price of the asset appears to follow a random walk. 
C) the market cannot establish an equilibrium price for the asset. 
D) the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms. 
A) the price of the asset rises above what appears to be its fundamental value. 
B) the price of the asset appears to follow a random walk. 
C) the market cannot establish an equilibrium price for the asset. 
D) the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.

Question 10

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

Accepted Answer

A) $550 one year from today. 
B) $580 two years from today. 
C) $600 three years from today. 
D) $615 four years from today. 
A) $550 one year from today. 
B) $580 two years from today. 
C) $600 three years from today. 
D) $615 four years from today.

Question 11

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 9% interest rate, the present val

Question 12

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Accepted Answer

A) $3,494.40 
B) $3,585.85 
C) $3,601.89 
D) $3,676.14 
A) $3,494.40 
B) $3,585.85 
C) $3,601.89 
D) $3,676.14

Question 13

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Accepted Answer

A) $98.18 
B) $100.96 
C) $102.04 
D) $103.24 
A) $98.18 
B) $100.96 
C) $102.04 
D) $103.24

Question 14

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

Accepted Answer

A) 2 percent 
B) 3 percent 
C) 4 percent 
D) 5 percent 
A) 2 percent 
B) 3 percent 
C) 4 percent 
D) 5 percent

Question 15

Suppose the interest rate is 8 percent. Consider three payment options:
1) $200 today.
2) $220 one year from today.
3) $240 two years from today.
Which of the following is correct?

Accepted Answer

A) Option 1 has the highest present value and Option 2 has the lowest. 
B) Option 2 has the highest present value and Option 3 has the lowest. 
C) Option 3 has the highest present value and Option 1 has the lowest. 
D) None of the above is correct. 
A) Option 1 has the highest present value and Option 2 has the lowest. 
B) Option 2 has the highest present value and Option 3 has the lowest. 
C) Option 3 has the highest present value and Option 1 has the lowest. 
D) None of the above is correct.

Question 16

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

Accepted Answer

A) $575.00 
B) $578.81 
C) $579.64 
D) None of the above is correct. 
A) $575.00 
B) $578.81 
C) $579.64 
D) None of the above is correct.

Question 17

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $5,000 or (2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is

Accepted Answer

A) 2 percent, but not if the interest rate is 3 percent. 
B) 3 percent, but not if the interest rate is 4 percent. 
C) 4 percent, but not if the interest rate is 5 percent. 
D) 5 percent, but not if the interest rate is 6 percent. 
A) 2 percent, but not if the interest rate is 3 percent. 
B) 3 percent, but not if the interest rate is 4 percent. 
C) 4 percent, but not if the interest rate is 5 percent. 
D) 5 percent, but not if the interest rate is 6 percent.

Question 18

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Accepted Answer

A) 5.50 percent 
B) 5.65 percent 
C) 6.25 percent 
D) 7.05 percent 
A) 5.50 percent 
B) 5.65 percent 
C) 6.25 percent 
D) 7.05 percent

Question 19

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Accepted Answer

A) 20 percent 
B) 25 percent 
C) 28 percent 
D) None of the above is correct. 
A) 20 percent 
B) 25 percent 
C) 28 percent 
D) None of the above is correct.

Question 20

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Accepted Answer

A) The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. 
B) The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. 
C) The interest rates on the two loans are the same. 
D) There is not enough information to determine which loan has the higher interest rate. 
A) The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. 
B) The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. 
C) The interest rates on the two loans are the same. 
D) There is not enough information to determine which loan has the higher interest rate.

Exam 27: Tools of Finance

Which of the following is the largest?

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Which of the following is not consistent with the efficient market hypothesis?

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

List two ways a risk adverse person may attempt to reduce risks.

An asset market is said to experience a speculative bubble when

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

Suppose the interest rate is 8 percent. Consider three payment options: 1) $200 today. 2) $220 one year from today. 3) $240 two years from today. Which of the following is correct?

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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