Question 1

The rate of return on short-term U.S.government bonds is often referred to as the

Accepted Answer

A) federal funds rate. 
B) discount rate. 
C) risk-free interest rate. 
D) yield rate. 
A) federal funds rate. 
B) discount rate. 
C) risk-free interest rate. 
D) yield rate.

Question 2

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately

Accepted Answer

A) 1.3 percent. 
B) 2 percent. 
C) 5 percent. 
D) 20 percent. 
A) 1.3 percent. 
B) 2 percent. 
C) 5 percent. 
D) 20 percent.

Question 3

A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200.If the bond were sold today, what would be the present value of the bond?

Accepted Answer

A) $200 
B) $157 
C) $150 
D) $145 
A) $200 
B) $157 
C) $150 
D) $145

Question 4

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.Indy should necessarily sell his stock if

Accepted Answer

A) the price falls below $20 per share. 
B) he expects the sum of future capital gains and dividends to be negative. 
C) the company stops paying dividends. 
D) any of these circumstances occur. 
A) the price falls below $20 per share. 
B) he expects the sum of future capital gains and dividends to be negative. 
C) the company stops paying dividends. 
D) any of these circumstances occur.

Question 5

After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than a $6,000 investment earning 1 percent annual interest.

Accepted Answer

A) True 
 B)False

Question 6

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

Accepted Answer

A) pooling. 
B) arbitrage. 
C) diversification. 
D) time preference. 
A) pooling. 
B) arbitrage. 
C) diversification. 
D) time preference.

Question 7

Another name for nondiversifiable risk is

Accepted Answer

A) inflationrisk. 
B) systemic risk. 
C) cyclical risk. 
D) idiosyncratic risk. 
A) inflationrisk. 
B) systemic risk. 
C) cyclical risk. 
D) idiosyncratic risk.

Question 8

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

Accepted Answer

A) $300 
B) $338.42 
C) $700 
D) $738.72 
A) $300 
B) $338.42 
C) $700 
D) $738.72

Question 9

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Accepted Answer

A) increase, and the rates of return would decrease relative to other companies. 
B) decrease, and the rates of return would increase relative to other companies. 
C) decrease, but the rates of return would stay the same relative to other companies. 
D) decrease, and the rates of return would decrease relative to other companies. 
A) increase, and the rates of return would decrease relative to other companies. 
B) decrease, and the rates of return would increase relative to other companies. 
C) decrease, but the rates of return would stay the same relative to other companies. 
D) decrease, and the rates of return would decrease relative to other companies.

Question 10

The Security Market line (SML) shows how the average expected rates of return on assets vary with

Accepted Answer

A) stock price. 
B) dividend payment. 
C) risk level. 
D) time preference. 
A) stock price. 
B) dividend payment. 
C) risk level. 
D) time preference.

Question 11

Investors diversify portfolios

Accepted Answer

A) because diversified portfolios pay the highest rates of return. 
B) because diversified portfolios are guaranteed not to lose money. 
C) to reduce the risk of losing their investment. 
D) to guarantee minimum returns on their investment. 
A) because diversified portfolios pay the highest rates of return. 
B) because diversified portfolios are guaranteed not to lose money. 
C) to reduce the risk of losing their investment. 
D) to guarantee minimum returns on their investment.

Question 12

Bankruptcy of a firm means that it

Accepted Answer

A) earned less revenues than its total costs. 
B) cannot meet its contractual obligations to its stockholders. 
C) has a lot of debt owed to its bondholders. 
D) is unable to make timely promised payments on its debt. 
A) earned less revenues than its total costs. 
B) cannot meet its contractual obligations to its stockholders. 
C) has a lot of debt owed to its bondholders. 
D) is unable to make timely promised payments on its debt.

Question 13

Average expected rates of return and levels of risk are positively related.

Accepted Answer

A) True 
 B)False

Question 14

The maximum amount of money that company shareholders can lose on their investment in the corporation is

Accepted Answer

A) whatever percentage of their wealth equals their percentage of ownership. 
B) whatever they paid for the shares in the company. 
C) whatever the corporation loses each year times the percentage of ownership in the company. 
D) zero. 
A) whatever percentage of their wealth equals their percentage of ownership. 
B) whatever they paid for the shares in the company. 
C) whatever the corporation loses each year times the percentage of ownership in the company. 
D) zero.

Question 15

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

Accepted Answer

A) True 
 B)False

Exam 37: Financial Economics

The rate of return on short-term U.S.government bonds is often referred to as the

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately

A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200.If the bond were sold today, what would be the present value of the bond?

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.Indy should necessarily sell his stock if

After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than a $6,000 investment earning 1 percent annual interest.

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

Another name for nondiversifiable risk is

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

The Security Market line (SML) shows how the average expected rates of return on assets vary with

Investors diversify portfolios

Bankruptcy of a firm means that it

Average expected rates of return and levels of risk are positively related.

The maximum amount of money that company shareholders can lose on their investment in the corporation is

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

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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