Question 1

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Accepted Answer

A) $2,000(1.06) 
B) $1,000 + $(1.06)2 
C) $1,000(1.06)2 
D) None of the above are correct. 
A) $2,000(1.06) 
B) $1,000 + $(1.06)2 
C) $1,000(1.06)2 
D) None of the above are correct.

Question 2

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Accepted Answer

A) moral hazard and market risk. 
B) moral hazard and firm specific risk. 
C) adverse selection and market risk. 
D) adverse selection and firm specific risk. 
A) moral hazard and market risk. 
B) moral hazard and firm specific risk. 
C) adverse selection and market risk. 
D) adverse selection and firm specific risk.

Question 3

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

Accepted Answer

A) rises. The company is more likely to buy the equipment. 
B) rises. The company is less likely to buy the equipment. 
C) falls. The company is more likely to buy the equipment. 
D) falls. The company is less likely to buy the equipment. 
A) rises. The company is more likely to buy the equipment. 
B) rises. The company is less likely to buy the equipment. 
C) falls. The company is more likely to buy the equipment. 
D) falls. The company is less likely to buy the equipment.

Question 4

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Accepted Answer

A) $3,680.00 
B) $3,712.77 
C) $3,750.00 
D) $3,772.57 
A) $3,680.00 
B) $3,712.77 
C) $3,750.00 
D) $3,772.57

Question 5

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Accepted Answer

A) both the firm-specific risk and the market risk of his portfolio. 
B) the firm-specific risk, but not the market risk of his portfolio. 
C) the market risk, but not the firm-specific risk of his portfolio. 
D) neither the market risk nor the firm-specific risk of his portfolio. 
A) both the firm-specific risk and the market risk of his portfolio. 
B) the firm-specific risk, but not the market risk of his portfolio. 
C) the market risk, but not the firm-specific risk of his portfolio. 
D) neither the market risk nor the firm-specific risk of his portfolio.

Question 6

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Accepted Answer

A) she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B) the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth. 
C) the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth. 
D) the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth. 
A) she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B) the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth. 
C) the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth. 
D) the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.

Question 7

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Accepted Answer

A) deadweight loss 
B) present value 
C) economic growth 
D) financial intermediation 
A) deadweight loss 
B) present value 
C) economic growth 
D) financial intermediation

Question 8

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 lowest 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 9

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

Accepted Answer

A) Both examples primarily illustrate adverse selection. 
B) Both examples primarily illustrate moral hazard. 
C) The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. 
D) The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection. 
A) Both examples primarily illustrate adverse selection. 
B) Both examples primarily illustrate moral hazard. 
C) The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. 
D) The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.

Question 10

Write the formula to find the present value of $x to be paid in n years.

Accepted Answer

The answer of Write the formula to find the present...

Question 11

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A) $500(1.05)2 + $500/(1.05)2 
B) $500(1.05)2 + $500 
C) $500 + $500/(1.05)2 
D) $500 + $500 
A) $500(1.05)2 + $500/(1.05)2 
B) $500(1.05)2 + $500 
C) $500 + $500/(1.05)2 
D) $500 + $500

Question 12

If stock prices follow a random walk, then stock investors can make large profits by

Accepted Answer

A) buying stocks whose prices have been falling for several days. 
B) buying stocks whose prices have been rising for several days. 
C) performing fundamental analysis of stocks using data contained in annual reports. 
D) using inside information. 
A) buying stocks whose prices have been falling for several days. 
B) buying stocks whose prices have been rising for several days. 
C) performing fundamental analysis of stocks using data contained in annual reports. 
D) using inside information.

Question 13

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A) the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B) the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C) the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D) the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions. 
A) the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B) the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C) the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D) the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.

Question 14

Scenario 27-2
Suppose Dave has a utility function   where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for   
.

Accepted Answer

Here is th

Question 15

Risk aversion helps to explain various things we observe in the economy, including

Accepted Answer

A) adherence to the old adage, "Don't put all your eggs in one basket." 
B) insurance. 
C) the risk-return trade-off. 
D) All of the above are correct. 
A) adherence to the old adage, "Don't put all your eggs in one basket." 
B) insurance. 
C) the risk-return trade-off. 
D) All of the above are correct.

Question 16

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A) upward-sloping and has decreasing slope. 
B) upward-sloping and has increasing slope. 
C) downward-sloping and has decreasing slope. 
D) downward-sloping and has increasing slope. 
A) upward-sloping and has decreasing slope. 
B) upward-sloping and has increasing slope. 
C) downward-sloping and has decreasing slope. 
D) downward-sloping and has increasing slope.

Question 17

How does adverse selection affect the insurance market?

Accepted Answer

High risk persons ar

Question 18

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today). Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

Accepted Answer

A) 2% 
B) ​5% 
C) ​7% 
D) ​10% 
A) 2% 
B) ​5% 
C) ​7% 
D) ​10%

Question 19

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Accepted Answer

A) You receive the payment 2 years from now and the interest rate is 6 percent. 
B) You receive the payment 2 years from now and the interest rate is 4 percent. 
C) You receive the payment 3 years from now and the interest rate is 6 percent. 
D) You receive the payment 3 years from now and the interest rate is 4 percent. 
A) You receive the payment 2 years from now and the interest rate is 6 percent. 
B) You receive the payment 2 years from now and the interest rate is 4 percent. 
C) You receive the payment 3 years from now and the interest rate is 6 percent. 
D) You receive the payment 3 years from now and the interest rate is 4 percent.

Question 20

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Accepted Answer

It is worth more if it is received in 5

Exam 27: Tools of Finance

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

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 lowest average annual rate of return?

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

Write the formula to find the present value of $x to be paid in n years.

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

If stock prices follow a random walk, then stock investors can make large profits by

A bank might make mortgages to people in different regions of the country. By doing so

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for .

Risk aversion helps to explain various things we observe in the economy, including

Diminishing marginal utility of wealth implies that the utility function is

How does adverse selection affect the insurance market?

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today). Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

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 have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today). Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?