Exam 27: Tools of Finance

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

What is the future value of $800 one year from today if the interest rate is 7 percent?

From the standpoint of the economy as a whole, the role of

Fundamental analysis determines the value of a stock based on

A risk-averse person

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Dividends

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Albert Einstein once referred to compounding as

The field of finance primarily studies

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.