Question 1

Discounting refers directly to

Accepted Answer

A) finding the present value of a future sum of money. 
B) finding the future value of a present sum of money. 
C) calculations that ignore the phenomenon of compounding for the sake of ease and simplicity. 
D) decreases in interest rates over time, while compounding refers to increases in interest rates over time. 
A) finding the present value of a future sum of money. 
B) finding the future value of a present sum of money. 
C) calculations that ignore the phenomenon of compounding for the sake of ease and simplicity. 
D) decreases in interest rates over time, while compounding refers to increases in interest rates over time.

Question 2

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

Accepted Answer

A) option A. 
B) option B. 
C) option C. 
D) either A or B because they are the same to her. 
A) option A. 
B) option B. 
C) option C. 
D) either A or B because they are the same to her.

Question 3

If Alan is risk-averse, then he will always

Accepted Answer

A) choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B) choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C) choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D) All of the above are correct. 
A) choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B) choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C) choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D) All of the above are correct.

Question 4

​Suppose you own a savings bond that will pay you $100 in 7 years. If the annual interest rate is 2%, what is the present value of the savings bond?

Accepted Answer

A) ​$27.91 
B) ​$87.06 
C) ​$93.64 
D) -​$87.06 
A) ​$27.91 
B) ​$87.06 
C) ​$93.64 
D) -​$87.06

Question 5

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Accepted Answer

A) increasing marginal utility of wealth and is risk averse. 
B) increasing marginal utility of wealth and is not risk averse. 
C) decreasing marginal utility of wealth and is risk averse. 
D) decreasing marginal utility of wealth and is not risk averse. 
A) increasing marginal utility of wealth and is risk averse. 
B) increasing marginal utility of wealth and is not risk averse. 
C) decreasing marginal utility of wealth and is risk averse. 
D) decreasing marginal utility of wealth and is not risk averse.

Question 6

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Accepted Answer

A) True 
 B)False

Question 7

The possibility of speculative bubbles in the stock market arises in part because

Accepted Answer

A) stock prices may not depend at all on psychological factors. 
B) fundamental analysis may be the correct way to evaluate the value of stocks. 
C) future streams of dividend payments are very hard to estimate. 
D) the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold. 
A) stock prices may not depend at all on psychological factors. 
B) fundamental analysis may be the correct way to evaluate the value of stocks. 
C) future streams of dividend payments are very hard to estimate. 
D) the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.

Question 8

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A) 5 
B) 6 
C) 8 
D) 9 
A) 5 
B) 6 
C) 8 
D) 9

Question 9

Susan is planning to invest in one of four stock portfolios, and her financial advisor has given her details regarding the risk associated with each portfolio. Which of the following portfolios would you expect to have the highest average annual rate of return?

Accepted Answer

A) ​A portfolio with a standard deviation of 3%. 
B) ​​​A portfolio with a standard deviation of 6%. 
C) ​A portfolio with a standard deviation of 9%. 
D) ​A portfolio with a standard deviation of 12%. 
A) ​A portfolio with a standard deviation of 3%. 
B) ​​​A portfolio with a standard deviation of 6%. 
C) ​A portfolio with a standard deviation of 9%. 
D) ​A portfolio with a standard deviation of 12%.

Question 10

Which of the following statements best describes the economist's view of finance and the financial system?

Accepted Answer

A) The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
B) The financial system, while interesting, is not very important to the functioning of the economy; however, the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
C) The financial system is very important to the functioning of the economy; however, the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful. 
D) The field of finance is intimately concerned with the financial system and the tools of finance, and financial economists see great importance in them; however, the "mainstream" economist sees little value in studying financial markets or the tools of finance. 
A) The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
B) The financial system, while interesting, is not very important to the functioning of the economy; however, the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
C) The financial system is very important to the functioning of the economy; however, the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful. 
D) The field of finance is intimately concerned with the financial system and the tools of finance, and financial economists see great importance in them; however, the "mainstream" economist sees little value in studying financial markets or the tools of finance.

Question 11

Svetlana is risk averse. Which of the following is correct about Svetlana?

Accepted Answer

A) Her marginal utility of wealth increases as her income increases. 
B) She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C) Her utility function is a straight line. 
D) None of the above are correct. 
A) Her marginal utility of wealth increases as her income increases. 
B) She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C) Her utility function is a straight line. 
D) None of the above are correct.

Question 12

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

Accepted Answer

Mark had more in his account.

Question 13

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

A) True 
 B)False

Question 14

After the 1982 recession, the U.S. and world economies entered into a long period

Accepted Answer

A) of high unemployment rates. 
B) high inflation rates. 
C) that has become known as the "Great Moderation." 
D) that has become known as the "Great Recession." 
A) of high unemployment rates. 
B) high inflation rates. 
C) that has become known as the "Great Moderation." 
D) that has become known as the "Great Recession."

Question 15

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 16

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Accepted Answer

A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction. 
A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction.

Question 17

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Accepted Answer

A) $300 paid in two years 
B) $150 paid in one year plus $140 paid in two years 
C) $100 paid today plus $100 paid in one year plus $100 paid in two years 
D) $285 today 
A) $300 paid in two years 
B) $150 paid in one year plus $140 paid in two years 
C) $100 paid today plus $100 paid in one year plus $100 paid in two years 
D) $285 today

Question 18

Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?

Accepted Answer

A) 9.6 percent 
B) 9.9 percent 
C) 10.2 percent 
D) 10.5 percent 
A) 9.6 percent 
B) 9.9 percent 
C) 10.2 percent 
D) 10.5 percent

Question 19

Figure 27-4. The figure shows a utility function for Alex.  
-Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Accepted Answer

A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C) Alex is risk averse. 
D) Alex is not risk averse. 
A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C) Alex is risk averse. 
D) Alex is not risk averse.

Question 20

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Accepted Answer

A) 5 percent 
B) 7 percent 
C) 10 percent 
D) 14 percent 
A) 5 percent 
B) 7 percent 
C) 10 percent 
D) 14 percent

Exam 27: Tools of Finance

Discounting refers directly to

If Alan is risk-averse, then he will always

​Suppose you own a savings bond that will pay you $100 in 7 years. If the annual interest rate is 2%, what is the present value of the savings bond?

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

The possibility of speculative bubbles in the stock market arises in part because

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Susan is planning to invest in one of four stock portfolios, and her financial advisor has given her details regarding the risk associated with each portfolio. Which of the following portfolios would you expect to have the highest average annual rate of return?

Which of the following statements best describes the economist's view of finance and the financial system?

Svetlana is risk averse. Which of the following is correct about Svetlana?

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

Risk aversion simply means that people dislike bad things to happen.

After the 1982 recession, the U.S. and world economies entered into a long period

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

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

Filters

Suppose you own a savings bond that will pay you $100 in 7 years. If the annual interest rate is 2%, what is the present value of the savings bond?