Question 1

If the interest rate is 3.75 percent, then what is the present value of $4,750 to be received in 11 years?

Accepted Answer

A) $7,121.36 
B) $3,168.29 
C) $2,666.09 
D) $3,806.09 
A) $7,121.36 
B) $3,168.29 
C) $2,666.09 
D) $3,806.09

Question 2

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Accepted Answer

A) About 6.3 years 
B) About 7 years 
C) About 7.7 years 
D) About 10 years 
A) About 6.3 years 
B) About 7 years 
C) About 7.7 years 
D) About 10 years

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Scenario 27-1
​
Lisa has a utility function
 $$U = W ^ { 1 / 2 }$$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
​
-Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for
 $$0 \leq W \leq 25$$ .
   ​

Accepted Answer

Here is th

Question 5

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 6

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 7

Scenario 27-1
​
Lisa has a utility function
 $$U = W ^ { 1 / 2 }$$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
​
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Lisa receives from

Question 8

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Accepted Answer

Only news that changes the pub

Question 9

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Accepted Answer

A) conjectural mistake. 
B) fundamental mishap. 
C) speculative bubble. 
D) temporary inefficiency. 
A) conjectural mistake. 
B) fundamental mishap. 
C) speculative bubble. 
D) temporary inefficiency.

Question 10

How does adverse selection affect the insurance market?

Accepted Answer

High risk persons ar

Question 11

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Accepted Answer

$1,600/$50 = 32. The rule of 70 says tha

Question 12

Suppose the interest rate is 5 percent. Consider four payment options: Option A: $500 today.
Option B: $515 one year from today.
Option C: $615 two years from today.
Option D: $690 three years from today.
​
Which of the payments has the highest present value today?

Accepted Answer

A) Option A 
B) Option D 
C) Option B 
D) Option C 
A) Option A 
B) Option D 
C) Option B 
D) Option C

Question 13

Figure 27-4  
-Refer to Figure 27-4. Which of the following statements is correct?

Accepted Answer

A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk, the greater the return. 
A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk, the greater the return.

Question 14

Cameron puts $300 into an account when the interest rate is 3 percent. Later he checks his balance and finds he has about $347.78. How long did Cameron wait to check his balance?

Accepted Answer

A) 5 years 
B) 4 years 
C) 6 years 
D) 7 years 
A) 5 years 
B) 4 years 
C) 6 years 
D) 7 years

Question 15

Recently, Mina's wealth increased by $525. If her wealth were to increase by another $525 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, and graphing wealth on each horizontal axis, Mina's utility function

Accepted Answer

A) and marginal utility function are both upward sloping. 
B) and marginal utility function are both downward sloping. 
C) is upward sloping and her marginal utility function is downward sloping. 
D) is downward sloping and her marginal utility function is upward sloping. 
A) and marginal utility function are both upward sloping. 
B) and marginal utility function are both downward sloping. 
C) is upward sloping and her marginal utility function is downward sloping. 
D) is downward sloping and her marginal utility function is upward sloping.

Question 16

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations. What does the efficient markets hypothesis predict will happen to Johnson's stock price.

Accepted Answer

The efficient markets hypothes

Question 17

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Accepted Answer

A) Doing research such as thoroughly reading and analyzing companies' annual reports 
B) Choosing mutual funds that are managed by individuals with good reputations 
C) Viewing individual stock prices as unpredictable 
D) Relying upon the advice of Wall Street analysts 
A) Doing research such as thoroughly reading and analyzing companies' annual reports 
B) Choosing mutual funds that are managed by individuals with good reputations 
C) Viewing individual stock prices as unpredictable 
D) Relying upon the advice of Wall Street analysts

Question 18

Scenario 27-2
​
Suppose Dave has a utility function
 $$U = 4 W ^ { 1 / 2 }$$ 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
 $$0 \leq W \leq 25$$ .
   ​

Accepted Answer

Here is th

Question 19

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

A) True 
 B)False

Question 20

A person with diminishing marginal utility of wealth is risk averse.

Accepted Answer

A) True 
 B)False

Exam 27: Tools of Finance

If the interest rate is 3.75 percent, then what is the present value of $4,750 to be received in 11 years?

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

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

Scenario 27-1 ​ Lisa has a utility function U=W1/2U = W ^ { 1 / 2 }U=W1/2 where W is Lisa's wealth in millions of dollars and U is the utility she obtains. ​ -Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for 0≤W≤250 \leq W \leq 250≤W≤25 . ​

The market for insurance is an example of diversification.

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

How does adverse selection affect the insurance market?

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Suppose the interest rate is 5 percent. Consider four payment options: Option A: $500 today. Option B: $515 one year from today. Option C: $615 two years from today. Option D: $690 three years from today. ​ Which of the payments has the highest present value today?

Figure 27-4 -Refer to Figure 27-4. Which of the following statements is correct?

Cameron puts $300 into an account when the interest rate is 3 percent. Later he checks his balance and finds he has about $347.78. How long did Cameron wait to check his balance?

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations. What does the efficient markets hypothesis predict will happen to Johnson's stock price.

Which of the following methods of picking stocks is not consistent with fundamental analysis?

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

A person with diminishing marginal utility of wealth is risk averse.

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 Nations 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 the interest rate is 5 percent. Consider four payment options: Option A: $500 today. Option B: $515 one year from today. Option C: $615 two years from today. Option D: $690 three years from today. Which of the payments has the highest present value today?