Question 1

The current price of an asset is equal to the future value of its expected returns or income streams.

Accepted Answer

A) True 
 B)False

Question 2

You estimate that a piece of real estate for investment will be worth $700,000 in ﬁve years. The current interest rate is 3 percent. What is the present value of this investment?

Accepted Answer

A)  $604,000 
B)  $624,000 
C)  $680,000 
D)  $700,000 
A)  $604,000 
B)  $624,000 
C)  $680,000 
D)  $700,000

Question 3

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is
compounded.

Accepted Answer

A) True 
 B)False

Question 4

Matt, a star basketball player, is looking to join a new NBA team. The Bulls are offering him $24 million for one year. The Heat is offering him $10 million this year and $7.0 million in each of the next
Two years. The market interest rate is 5 percent. What is the present value of the offer from The
Heat in millions (rounded to the nearest one hundred thousand dollars)?

Accepted Answer

A)  $22.5 million 
B)  $23.0 million 
C)  $24.0 million 
D)  $25.2 million 
A)  $22.5 million 
B)  $23.0 million 
C)  $24.0 million 
D)  $25.2 million

Question 5

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 6

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 7

(Consider This) According to critics, growth in the popularity of mutual funds has

Accepted Answer

A)  signiﬁcantly increased market risk for investors. 
B)  created more macroeconomic instability. 
C)  led corporate management and fund managers to focus more on short-run share prices than long-run investor returns. 
D)  discouraged average citizens from investing in stock and bond markets. 
A)  signiﬁcantly increased market risk for investors. 
B)  created more macroeconomic instability. 
C)  led corporate management and fund managers to focus more on short-run share prices than long-run investor returns. 
D)  discouraged average citizens from investing in stock and bond markets.

Question 8

(Last Word) Passively managed funds produce higher rates of return for investors than actively managed funds because

Accepted Answer

A)  trading and management costs are higher with actively managed funds. 
B)  passively managed funds invest in riskier assets that have higher rates of return. 
C)  actively managed funds invest in riskier assets that have not reached expected rates of return. 
D)  actively managed funds are taxed, while passively managed funds are not taxable. 
A)  trading and management costs are higher with actively managed funds. 
B)  passively managed funds invest in riskier assets that have higher rates of return. 
C)  actively managed funds invest in riskier assets that have not reached expected rates of return. 
D)  actively managed funds are taxed, while passively managed funds are not taxable.

Question 9

The present value of a future amount of money will be greater the

Accepted Answer

A)  greater the interest rate. 
B)  greater the amount of time before the future payment is received. 
C)  lower the interest rate. 
D)  greater the rate of the expected rate of inﬂation. 
A)  greater the interest rate. 
B)  greater the amount of time before the future payment is received. 
C)  lower the interest rate. 
D)  greater the rate of the expected rate of inﬂation.

Question 10

(Advanced analysis) Tani invests $100 in a ﬁnancial asset earning an annually compounded interest rate of 5 percent. In about how many years will her investment be worth $150?

Accepted Answer

A)  5.2 
B)  6.8 
C)  8.3 
D)  10 
A)  5.2 
B)  6.8 
C)  8.3 
D)  10

Question 11

Compound interest

Accepted Answer

A)  describes how quickly an interest-bearing asset increases in value. 
B)  measures the rate of return of a portfolio of stocks and bonds. 
C)  measures the after-tax, inﬂation-adjusted rate of interest. 
D)  refers to the multiple rates of interest of various types of bonds in a portfolio. 
A)  describes how quickly an interest-bearing asset increases in value. 
B)  measures the rate of return of a portfolio of stocks and bonds. 
C)  measures the after-tax, inﬂation-adjusted rate of interest. 
D)  refers to the multiple rates of interest of various types of bonds in a portfolio.

Question 12

The concept of time preference in ﬁnancial investing rests on the belief that people

Accepted Answer

A)  are indifferent between present and future consumption. 
B)  are patient. 
C)  are impatient. 
D)  intentionally consume 50 percent of assets in the present and 50 percent in the future. 
A)  are indifferent between present and future consumption. 
B)  are patient. 
C)  are impatient. 
D)  intentionally consume 50 percent of assets in the present and 50 percent in the future.

Question 13

Financial investment refers to

Accepted Answer

A)  the same idea as economic investment. 
B)  earning proﬁts from producing goods and services. 
C)  purchasing or building an asset for monetary gain. 
D)  making new additions to the capital stock. 
A)  the same idea as economic investment. 
B)  earning proﬁts from producing goods and services. 
C)  purchasing or building an asset for monetary gain. 
D)  making new additions to the capital stock.

Question 14

Refer to the graph. The risk premium for an asset with a beta equal to X would be

Accepted Answer

A)  Z. 
B)  A plus B. 
C)  Z minus B. 
D)  Z minus A. 
A)  Z. 
B)  A plus B. 
C)  Z minus B. 
D)  Z minus A.

Question 15

During the ﬁnancial crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to

Accepted Answer

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

Question 16

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in ﬁve years. What annually compounded rate of interest would she have to earn to reach her goal?

Accepted Answer

A)  4.6 percent 
B)  6.5 percent 
C)  8.4 percent 
D)  9.3 percent 
A)  4.6 percent 
B)  6.5 percent 
C)  8.4 percent 
D)  9.3 percent

Question 17

Which of the following is not common to all investments?

Accepted Answer

A)  Investors are required to pay some price to acquire them. 
B)  Owners are given the opportunity to receive future payments. 
C)  Future payments are typically risky. 
D)  The investment pays a positive rate of interest. 
A)  Investors are required to pay some price to acquire them. 
B)  Owners are given the opportunity to receive future payments. 
C)  Future payments are typically risky. 
D)  The investment pays a positive rate of interest.

Question 18

If a corporation goes bankrupt,

Accepted Answer

A)  neither stockholders nor bondholders receive any money. 
B)  stockholders get paid from the sale of company assets before bondholders do. 
C)  bondholders get paid from the sale of company assets before stockholders do. 
D)  stockholders must honor the debts to bondholders out of personal assets if necessary. 
A)  neither stockholders nor bondholders receive any money. 
B)  stockholders get paid from the sale of company assets before bondholders do. 
C)  bondholders get paid from the sale of company assets before stockholders do. 
D)  stockholders must honor the debts to bondholders out of personal assets if necessary.

Question 19

Refer to the graph. Each labeled point represents a different asset. For which of these assets would we not expect arbitrage to change the average expected rate of return?

Accepted Answer

A)  E only 
B)  D, E, and F 
C)  E, G, and H 
D)  D, E, F, G, and H 
A)  E only 
B)  D, E, and F 
C)  E, G, and H 
D)  D, E, F, G, and H

Question 20

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.

The current price of an asset is equal to the future value of its expected returns or income streams.

You estimate that a piece of real estate for investment will be worth $700,000 in ﬁve years. The current interest rate is 3 percent. What is the present value of this investment?

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

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

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

(Consider This) According to critics, growth in the popularity of mutual funds has

(Last Word) Passively managed funds produce higher rates of return for investors than actively managed funds because

The present value of a future amount of money will be greater the

(Advanced analysis) Tani invests $100 in a ﬁnancial asset earning an annually compounded interest rate of 5 percent. In about how many years will her investment be worth $150?

Compound interest

The concept of time preference in ﬁnancial investing rests on the belief that people

Financial investment refers to

Refer to the graph. The risk premium for an asset with a beta equal to X would be

During the ﬁnancial crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in ﬁve years. What annually compounded rate of interest would she have to earn to reach her goal?

Which of the following is not common to all investments?

If a corporation goes bankrupt,

Refer to the graph. Each labeled point represents a different asset. For which of these assets would we not expect arbitrage to change the average expected rate of return?

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

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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

Filters

Exam 17: Financial Economics

The current price of an asset is equal to the future value of its expected returns or income streams.

You estimate that a piece of real estate for investment will be worth $700,000 in ﬁve years. The current interest rate is 3 percent. What is the present value of this investment?

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

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

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

(Consider This) According to critics, growth in the popularity of mutual funds has

(Last Word) Passively managed funds produce higher rates of return for investors than actively managed funds because

The present value of a future amount of money will be greater the

(Advanced analysis) Tani invests $100 in a ﬁnancial asset earning an annually compounded interest rate of 5 percent. In about how many years will her investment be worth $150?

Compound interest

The concept of time preference in ﬁnancial investing rests on the belief that people

Financial investment refers to

Refer to the graph. The risk premium for an asset with a beta equal to X would be

During the ﬁnancial crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in ﬁve years. What annually compounded rate of interest would she have to earn to reach her goal?

Which of the following is not common to all investments?

If a corporation goes bankrupt,

Refer to the graph. Each labeled point represents a different asset. For which of these assets would we not expect arbitrage to change the average expected rate of return?

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

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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

Filters