Exam 27: Tools of Finance

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

An index fund

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing

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

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

In the 1990s, Fed Chairperson Alan Greenspan questioned whether the stock market

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 7%, should the firm undertake the project? Show evidence to support your answer.

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

The performance of index funds

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

If asset markets are driven by the "animal spirits" of investors, then

The market for insurance is an example of diversification.

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Suppose the interest rate is 8 percent. Consider three payment options. 1) $300 today. 2) $330 one year from today. 3) $360 two years from today. Which of the following is correct?

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting