Question 1

Compound interest describes increases in value when interest is paid, or compounded, on

Accepted Answer

A) only the original amount invested. 
B) only the previously accumulated interest payments. 
C) the original amount invested and previously accumulated interest payments. 
D) the original amount invested minus any previously accumulated interest payments. 
A) only the original amount invested. 
B) only the previously accumulated interest payments. 
C) the original amount invested and previously accumulated interest payments. 
D) the original amount invested minus any previously accumulated interest payments.

Question 2

Arbitrage equalizes rates of return across similar investments because

Accepted Answer

A) arbitrage also equalizes the prices of the assets. 
B) investors prefer diversity. 
C) investors will want to replace lower rate of return assets with those generating higher rates of return. 
D) investors will want to replace higher rate of return assets with those generating lower rates of return. 
A) arbitrage also equalizes the prices of the assets. 
B) investors prefer diversity. 
C) investors will want to replace lower rate of return assets with those generating higher rates of return. 
D) investors will want to replace higher rate of return assets with those generating lower rates of return.

Question 3

George buys an antique car for $20,000 and sells it five years later for just over $24,000.George's per-year rate of return is

Accepted Answer

A) 20 percent. 
B) 12 percent. 
C) 10 percent. 
D) 4 percent. 
A) 20 percent. 
B) 12 percent. 
C) 10 percent. 
D) 4 percent.

Question 4

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Accepted Answer

A) True 
 B)False

Question 5

Susan recently purchased a home for $150,000.She plans to rent it out for $1,000 per month for a year.Had the house cost $200,000 instead, her expected rate of return would have

Accepted Answer

A) decreased by 1 percentage point. 
B) decreased by 2 percentage points. 
C) increased by 2 percentage points. 
D) increased by 3 percentage points. 
A) decreased by 1 percentage point. 
B) decreased by 2 percentage points. 
C) increased by 2 percentage points. 
D) increased by 3 percentage points.

Question 6

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

Accepted Answer

A) present value 
B) future value 
C) compound interest 
D) real rate of interest 
A) present value 
B) future value 
C) compound interest 
D) real rate of interest

Question 7

A change in Federal Reserve monetary policy will

Accepted Answer

A) have no effect on the Security Market Line. 
B) invert the Security Market Line. 
C) change the slope of the Security Market Line. 
D) cause a vertical shift of the Security Market Line. 
A) have no effect on the Security Market Line. 
B) invert the Security Market Line. 
C) change the slope of the Security Market Line. 
D) cause a vertical shift of the Security Market Line.

Question 8

A mutual fund company uses the funds of its investors to

Accepted Answer

A) produce goods and services for consumers. 
B) buy stocks and bonds. 
C) build factories and other infrastructure. 
D) buy capital and other resources for other firms. 
A) produce goods and services for consumers. 
B) buy stocks and bonds. 
C) build factories and other infrastructure. 
D) buy capital and other resources for other firms.

Question 9

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond

Accepted Answer

A) is $110. 
B) is $125. 
C) is $140. 
D) depends on rates of return she could earn on other, similar investments. 
A) is $110. 
B) is $125. 
C) is $140. 
D) depends on rates of return she could earn on other, similar investments.

Question 10

Nondiversifiable risk refers to potential losses from

Accepted Answer

A) random fluctuations in specific stocks. 
B) bad company policies. 
C) portfolio management fraud. 
D) events that move all investments in the same direction. 
A) random fluctuations in specific stocks. 
B) bad company policies. 
C) portfolio management fraud. 
D) events that move all investments in the same direction.

Question 11

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Accepted Answer

A) Less risky assets will have similar average expected rates of return to more risky assets. 
B) Less risky assets will have higher average expected rates of return than more risky assets. 
C) More risky assets will have higher average expected rates of return than less risky assets. 
D) More risky assets will have lower average expected rates of return than less risky assets. 
A) Less risky assets will have similar average expected rates of return to more risky assets. 
B) Less risky assets will have higher average expected rates of return than more risky assets. 
C) More risky assets will have higher average expected rates of return than less risky assets. 
D) More risky assets will have lower average expected rates of return than less risky assets.

Question 12

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Accepted Answer

A) True 
 B)False

Question 13

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Accepted Answer

A) $38,050 
B) $39,516 
C) $40,323 
D) $42,108 
A) $38,050 
B) $39,516 
C) $40,323 
D) $42,108

Question 14

If the Federal Reserve conducts an open-market purchase, then the SML will

Accepted Answer

A) shift up. 
B) shift down. 
C) rotate and become steeper. 
D) rotate and become flatter. 
A) shift up. 
B) shift down. 
C) rotate and become steeper. 
D) rotate and become flatter.

Question 15

An expansionary monetary policy will shift the Security Market Line down.

Accepted Answer

A) True 
 B)False

Question 16

Rick recently purchased a convenience store for $500,000.He expects monthly profits to be $10,000 in the next year.If a recession had struck, Rick had instead paid $300,000, and his monthly profits were reduced to $6,000, his expected rate of return would have

Accepted Answer

A) increased by 2 percentage points. 
B) increased by 3 percentage points. 
C) decreased by 2 percentage points. 
D) remained the same. 
A) increased by 2 percentage points. 
B) increased by 3 percentage points. 
C) decreased by 2 percentage points. 
D) remained the same.

Question 17

An asset's price and rate of return

Accepted Answer

A) are independent of each other. 
B) can be either inversely or directly related. 
C) are inversely related. 
D) are directly related. 
A) are independent of each other. 
B) can be either inversely or directly related. 
C) are inversely related. 
D) are directly related.

Question 18

The limited liability rule means that if a corporation goes bankrupt,

Accepted Answer

A) shareholders are responsible for all the debts of the firm. 
B) bondholders are responsible for all the debts of the firm. 
C) shareholders can only lose the amount they invested. 
D) bondholders only lose the face value of the bond. 
A) shareholders are responsible for all the debts of the firm. 
B) bondholders are responsible for all the debts of the firm. 
C) shareholders can only lose the amount they invested. 
D) bondholders only lose the face value of the bond.

Question 19

Limited liability rules

Accepted Answer

A) mean that bankrupt companies owe nothing to corporate bondholders. 
B) discourage investment in corporate stock. 
C) help prevent corporate fraud. 
D) encourage stock investing by limiting shareholder risk of loss. 
A) mean that bankrupt companies owe nothing to corporate bondholders. 
B) discourage investment in corporate stock. 
C) help prevent corporate fraud. 
D) encourage stock investing by limiting shareholder risk of loss.

Question 20

Which of the following financial assets is considered to be essentially risk-free?

Accepted Answer

A) gold 
B) stock in Fortune 500 companies 
C) real estate 
D) short-term U.S.government bonds 
A) gold 
B) stock in Fortune 500 companies 
C) real estate 
D) short-term U.S.government bonds

Exam 37: Financial Economics

Compound interest describes increases in value when interest is paid, or compounded, on

Arbitrage equalizes rates of return across similar investments because

George buys an antique car for $20,000 and sells it five years later for just over $24,000.George's per-year rate of return is

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Susan recently purchased a home for $150,000.She plans to rent it out for $1,000 per month for a year.Had the house cost $200,000 instead, her expected rate of return would have

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

A change in Federal Reserve monetary policy will

A mutual fund company uses the funds of its investors to

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond

Nondiversifiable risk refers to potential losses from

Which of the following statements best describes the relationship between risk and the average expected return of investments?

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

If the Federal Reserve conducts an open-market purchase, then the SML will

An expansionary monetary policy will shift the Security Market Line down.

Rick recently purchased a convenience store for $500,000.He expects monthly profits to be $10,000 in the next year.If a recession had struck, Rick had instead paid $300,000, and his monthly profits were reduced to $6,000, his expected rate of return would have

An asset's price and rate of return

The limited liability rule means that if a corporation goes bankrupt,

Limited liability rules

Which of the following financial assets is considered to be essentially risk-free?

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

Elasticity

Utility Maximization

Behavioral Economics

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Technology, Rd, and Efficiency

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

Health Care

Immigration

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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