Question 1

Which of the following changes would increase the present value of a future payment?

Accepted Answer

A) a decrease in the size of the payment 
B) an increase in the time until the payment is made 
C) a decrease in the interest rate 
D) All of the above are correct. 
A) a decrease in the size of the payment 
B) an increase in the time until the payment is made 
C) a decrease in the interest rate 
D) All of the above are correct.

Question 2

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A) Interest rates rise and truck prices rise. 
B) Interest rates fall and truck prices rise. 
C) Interest rates rise and truck prices fall. 
D) Interest rates fall and truck prices fall. 
A) Interest rates rise and truck prices rise. 
B) Interest rates fall and truck prices rise. 
C) Interest rates rise and truck prices fall. 
D) Interest rates fall and truck prices fall.

Question 3

What is the future value of $450 at an interest rate of 9 percent two years from today?

Accepted Answer

A) $534.65 
B) $546.35 
C) $565.18 
D) $574.13 
A) $534.65 
B) $546.35 
C) $565.18 
D) $574.13

Question 4

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

Accepted Answer

A) an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account 
B) an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account 
C) an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account 
D) an interest rate of 4.5 percent, with no processing fee and no bonus 
A) an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account 
B) an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account 
C) an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account 
D) an interest rate of 4.5 percent, with no processing fee and no bonus

Question 5

The value of a stock is based on the

Accepted Answer

A) present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B) present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C) future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D) future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
A) present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B) present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C) future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D) future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.

Question 6

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Accepted Answer

The answer of Write the formula for finding the future...

Question 7

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

Accepted Answer

A) the risk-return tradeoff. 
B) insurance. 
C) diversification. 
D) All of the above are correct. 
A) the risk-return tradeoff. 
B) insurance. 
C) diversification. 
D) All of the above are correct.

Question 8

A risk-averse person has

Accepted Answer

A) a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B) a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C) a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D) a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth. 
A) a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B) a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C) a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D) a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.

Question 9

Should a person who is risk averse hold a portfolio with no stock and only bonds?
Explain.

Accepted Answer

Not necessarily. Historically bonds have

Question 10

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

Accepted Answer

A) 4.88 percent 
B) 6.00 percent 
C) 12.36 percent 
D) None of the above is correct. 
A) 4.88 percent 
B) 6.00 percent 
C) 12.36 percent 
D) None of the above is correct.

Question 11

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Accepted Answer

A) 4 percent 
B) 5 percent 
C) 6 percent 
D) None of the above would give a present value within a cent of $162.24. 
A) 4 percent 
B) 5 percent 
C) 6 percent 
D) None of the above would give a present value within a cent of $162.24.

Question 12

Which, if any, of the present values below are computed correctly?

Accepted Answer

A) A payment of $100 to be received one year from today, with a 2 percent interest rate, has a present value of $98.81. 
B) A payment of $200 to be received two years from today, with a 3 percent interest rate, has a present value of $188.52. 
C) A payment of $300 to be received three years from today, with a 4 percent interest rate, has a present value of $234.34. 
D) None of the above are correct to the nearest cent. 
A) A payment of $100 to be received one year from today, with a 2 percent interest rate, has a present value of $98.81. 
B) A payment of $200 to be received two years from today, with a 3 percent interest rate, has a present value of $188.52. 
C) A payment of $300 to be received three years from today, with a 4 percent interest rate, has a present value of $234.34. 
D) None of the above are correct to the nearest cent.

Question 13

If Joanna is risk averse, then

Accepted Answer

A) her utility function exhibits the property of decreasing utility. 
B) her utility function exhibits the property of increasing marginal utility. 
C) she dislikes bad things more than she likes comparable good things. 
D) she is unlike most people, because most people are not risk averse. 
A) her utility function exhibits the property of decreasing utility. 
B) her utility function exhibits the property of increasing marginal utility. 
C) she dislikes bad things more than she likes comparable good things. 
D) she is unlike most people, because most people are not risk averse.

Question 14

Economists disagree as to whether

Accepted Answer

A) the stock price of a company should reflect the company's expected profitability. 
B) the basic tools of finance reflect valid ideas. 
C) stock prices reflect rational estimates of a company's true worth. 
D) there is any relationship between stock market fluctuations and fluctuations in the economy more broadly. 
A) the stock price of a company should reflect the company's expected profitability. 
B) the basic tools of finance reflect valid ideas. 
C) stock prices reflect rational estimates of a company's true worth. 
D) there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.

Question 15

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces

Question 16

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than 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 17

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Accepted Answer

A) True 
 B)False

Question 18

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that

Question 19

Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance. This is an example of the moral hazard problem associated with insurance.​

Accepted Answer

A) True 
 B)False

Question 20

Laura says that the present value of $700 to be received one year from today if the interest rate is 6 percent is less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Cassie says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

Accepted Answer

A) Both Laura and Cassie are correct. 
B) Both Laura and Cassie are incorrect. 
C) Only Laura is correct. 
D) Only Cassie is correct. 
A) Both Laura and Cassie are correct. 
B) Both Laura and Cassie are incorrect. 
C) Only Laura is correct. 
D) Only Cassie is correct.

Exam 27: Tools of Finance

Which of the following changes would increase the present value of a future payment?

What is the future value of $450 at an interest rate of 9 percent two years from today?

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

The value of a stock is based on the

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

A risk-averse person has

Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Which, if any, of the present values below are computed correctly?

If Joanna is risk averse, then

Economists disagree as to whether

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance. This is an example of the moral hazard problem associated with insurance.​

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 Dave drives more recklessly when he has car insurance than when he does not have car insurance. This is an example of the moral hazard problem associated with insurance.