Question 1

The primary risk that bondholders face is that

Accepted Answer

A)  the bond will reduce in price. 
B)  the bond issuer will default. 
C)  inﬂation will decrease. 
D)  the rate of return will increase. 
A)  the bond will reduce in price. 
B)  the bond issuer will default. 
C)  inﬂation will decrease. 
D)  the rate of return will increase.

Question 2

Refer to the graph. Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a ﬁnancial asset?

Accepted Answer

A)  line A 
B)  line B 
C)  line C 
D)  none of these 
A)  line A 
B)  line B 
C)  line C 
D)  none of these

Question 3

An investment with a beta of 4.0 means that the investment has four times the

Accepted Answer

A)  average expected rate of return of the market portfolio. 
B)  risk of all similar investments. 
C)  level of nondiversiﬁable risk as the market portfolio. 
D)  level of diversiﬁable risk as the market portfolio. 
A)  average expected rate of return of the market portfolio. 
B)  risk of all similar investments. 
C)  level of nondiversiﬁable risk as the market portfolio. 
D)  level of diversiﬁable risk as the market portfolio.

Question 4

The formula for present value allows investors to

Accepted Answer

A)  convert a given number of dollars in the future into its present equivalent. 
B)  determine the future impact of inﬂation on a present amount of money. 
C)  know which ﬁnancial assets will provide the greatest future returns. 
D)  do all of these. 
A)  convert a given number of dollars in the future into its present equivalent. 
B)  determine the future impact of inﬂation on a present amount of money. 
C)  know which ﬁnancial assets will provide the greatest future returns. 
D)  do all of these.

Question 5

The process of arbitrage

Accepted Answer

A)  raises or lowers the average expected rate of return of a ﬁnancial asset with a given level of risk. 
B)  vertically shifts the Security Market Line. 
C)  moves a ﬁnancial asset along the Security Market Line. 
D)  pushes all ﬁnancial assets to the same average expected rate of return and risk level. 
A)  raises or lowers the average expected rate of return of a ﬁnancial asset with a given level of risk. 
B)  vertically shifts the Security Market Line. 
C)  moves a ﬁnancial asset along the Security Market Line. 
D)  pushes all ﬁnancial assets to the same average expected rate of return and risk level.

Question 6

Explain the logic behind the fact that if the Federal Reserve raises the risk-free interest rate, return
rates of other assets must rise by the same amount.

Accepted Answer

When the Federal Reserve raises the risk

Question 7

A bond that is currently selling at $1,000 offers to pay $50 annually. What is the percentage rate of return on the bond?

Accepted Answer

A)  5 percent 
B)  10 percent 
C)  20 percent 
D)  50 percent 
A)  5 percent 
B)  10 percent 
C)  20 percent 
D)  50 percent

Question 8

The average expected rate of return on an asset can be fully understood as the rate that
compensates for risk.

Accepted Answer

A) True 
 B)False

Question 9

Maria is looking to buy one of two houses to rent out for additional income. She determines that the ﬁrst house, priced at $200,000, could rent for $1,500 per month. If the second house is priced at
$280,000, how much rent would Maria have to charge to get an equivalent yearly rate of return?

Accepted Answer

A)  $2,100 per month 
B)  $2,600 per month 
C)  $2,800 per month 
D)  It cannot be determined with the information given. 
A)  $2,100 per month 
B)  $2,600 per month 
C)  $2,800 per month 
D)  It cannot be determined with the information given.

Question 10

If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's

Accepted Answer

A)  expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio. 
B)  expected rate of return is higher than could be had from some combination of the risk-free asset and the market portfolio. 
C)  price will rise as arbitrage proceeds in the market. 
D)  risk will rise as arbitrage proceeds in the market. 
A)  expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio. 
B)  expected rate of return is higher than could be had from some combination of the risk-free asset and the market portfolio. 
C)  price will rise as arbitrage proceeds in the market. 
D)  risk will rise as arbitrage proceeds in the market.

Question 11

Which of the following statements best reﬂects the concept of present value?

Accepted Answer

A)  "The savings bond I bought ﬁve years ago is now worth $1,000." 
B)  "My $100 savings bond will be worth $200 in 10 years." 
C)  "You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now." 
D)  "The $5,000 in my savings account is worth less today than ﬁve years ago because of inﬂation." 
A)  "The savings bond I bought ﬁve years ago is now worth $1,000." 
B)  "My $100 savings bond will be worth $200 in 10 years." 
C)  "You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now." 
D)  "The $5,000 in my savings account is worth less today than ﬁve years ago because of inﬂation."

Question 12

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 13

Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000. What is Pigou's per-year rate of return?

Accepted Answer

A)  4.8 percent 
B)  9.8 percent 
C)  20 percent 
D)  39.2 percent 
A)  4.8 percent 
B)  9.8 percent 
C)  20 percent 
D)  39.2 percent

Question 14

The rise of mutual funds has radically changed the way corporations are controlled in that

Accepted Answer

A)  it shifted ownership away from individual investors toward "institutional" investors like mutual funds. 
B)  mutual funds increased the percentage of corporate shares owned by individual investors. 
C)  corporate ownership became restricted to a select few. 
D)  it reduced the share of private ownership and increased the share of public (government) ownership. 
A)  it shifted ownership away from individual investors toward "institutional" investors like mutual funds. 
B)  mutual funds increased the percentage of corporate shares owned by individual investors. 
C)  corporate ownership became restricted to a select few. 
D)  it reduced the share of private ownership and increased the share of public (government) ownership.

Question 15

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

Accepted Answer

A)  $205 
B)  $210 
C)  $240 
D)  $300 
A)  $205 
B)  $210 
C)  $240 
D)  $300

Question 16

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 17

The estimated value of all ﬁnancial assets held by U.S. households in 2017 was about

Accepted Answer

A)  $8.1 trillion. 
B)  $17.9 trillion. 
C)  $54 trillion. 
D)  $82 trillion. 
A)  $8.1 trillion. 
B)  $17.9 trillion. 
C)  $54 trillion. 
D)  $82 trillion.

Question 18

The average expected rate of return of a ﬁnancial asset equals

Accepted Answer

A)  the rate that compensates for time preference plus the rate that compensates for risk. 
B)  the rate that compensates for time preference plus the rate of inﬂation. 
C)  beta plus the rate that compensates for risk. 
D)  the risk-free interest rate plus the rate of inﬂation. 
A)  the rate that compensates for time preference plus the rate that compensates for risk. 
B)  the rate that compensates for time preference plus the rate of inﬂation. 
C)  beta plus the rate that compensates for risk. 
D)  the risk-free interest rate plus the rate of inﬂation.

Question 19

The U.S. federal government is unlikely to default on its bond payments because

Accepted Answer

A)  if necessary, it can print the money needed to make payments on time. 
B)  its bond payments are insured. 
C)  the U.S. federal budget usually runs a surplus, providing ample funds for repaying debt. 
D)  of all of these. 
A)  if necessary, it can print the money needed to make payments on time. 
B)  its bond payments are insured. 
C)  the U.S. federal budget usually runs a surplus, providing ample funds for repaying debt. 
D)  of all of these.

Question 20

The terms "economic investment" and "ﬁnancial investment" can be used synonymously.

Accepted Answer

A) True 
 B)False

Exam 17: Financial Economics

The primary risk that bondholders face is that

Refer to the graph. Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a ﬁnancial asset?

An investment with a beta of 4.0 means that the investment has four times the

The formula for present value allows investors to

The process of arbitrage

Explain the logic behind the fact that if the Federal Reserve raises the risk-free interest rate, return rates of other assets must rise by the same amount.

A bond that is currently selling at $1,000 offers to pay $50 annually. What is the percentage rate of return on the bond?

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Maria is looking to buy one of two houses to rent out for additional income. She determines that the ﬁrst house, priced at $200,000, could rent for $1,500 per month. If the second house is priced at $280,000, how much rent would Maria have to charge to get an equivalent yearly rate of return?

If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's

Which of the following statements best reﬂects the concept of present value?

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

Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000. What is Pigou's per-year rate of return?

The rise of mutual funds has radically changed the way corporations are controlled in that

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

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 estimated value of all ﬁnancial assets held by U.S. households in 2017 was about

The average expected rate of return of a ﬁnancial asset equals

The U.S. federal government is unlikely to default on its bond payments because

The terms "economic investment" and "ﬁnancial investment" can be used synonymously.

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

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