Question 1

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

Accepted Answer

A) You receive the payment 4 years from now and the interest rate is 4 percent. 
B) You receive the payment 4 years from now and the interest rate is 5 percent. 
C) You receive the payment 5 years from now and the interest rate is 4 percent. 
D) You receive the payment 5 years from now and the interest rate is 5 percent. 
A) You receive the payment 4 years from now and the interest rate is 4 percent. 
B) You receive the payment 4 years from now and the interest rate is 5 percent. 
C) You receive the payment 5 years from now and the interest rate is 4 percent. 
D) You receive the payment 5 years from now and the interest rate is 5 percent.

Question 2

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A) the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B) the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C) the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D) the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions. 
A) the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B) the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C) the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D) the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.

Question 3

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Accepted Answer

A) $400 
B) $800 
C) $1,600 
D) $3,200 
A) $400 
B) $800 
C) $1,600 
D) $3,200

Question 4

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Accepted Answer

A) market risk by more than an increase from 110 to 120. 
B) market risk by less than an increase from 110 to 120. 
C) firm-specific risk by more than an increase from 110 to 120. 
D) firm-specific risk by less than an increase from 110 to 120. 
A) market risk by more than an increase from 110 to 120. 
B) market risk by less than an increase from 110 to 120. 
C) firm-specific risk by more than an increase from 110 to 120. 
D) firm-specific risk by less than an increase from 110 to 120.

Question 5

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Accepted Answer

A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction. 
A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction.

Question 6

Figure 14-2. The figure shows a utility function for Mary Ann.  
-Refer to Figure 14-2. Suppose the vertical distance between the points (0, A) and (0, B) is 5. If her wealth increased from $1,050 to $1,350, then

Accepted Answer

A) Mary Ann's subjective measure of her well-being would increase by less than 5 units. 
B) Mary Ann's subjective measure of her well-being would increase by more than 5 units. 
C) Mary Ann would change from being a risk-averse person into a person who is not risk averse. 
D) Mary Ann would change from being a person who is not risk averse into a risk-averse person. 
A) Mary Ann's subjective measure of her well-being would increase by less than 5 units. 
B) Mary Ann's subjective measure of her well-being would increase by more than 5 units. 
C) Mary Ann would change from being a risk-averse person into a person who is not risk averse. 
D) Mary Ann would change from being a person who is not risk averse into a risk-averse person.

Question 7

In answering which of the following questions would you find it necessary to calculate a present value?

Accepted Answer

A) Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D) You would find it necessary to calculate a present value in order to answer all of these questions. 
A) Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D) You would find it necessary to calculate a present value in order to answer all of these questions.

Question 8

Some people claim that stocks follow a random walk. What does this mean?

Accepted Answer

A) The price of stock one day is about what it was on the previous day. 
B) Changes in stock prices cannot be predicted from available information. 
C) Stock prices are not determined by market fundamentals such as supply and demand. 
D) Prices of stocks of different firms in the same industry show no or little tendency to move together. 
A) The price of stock one day is about what it was on the previous day. 
B) Changes in stock prices cannot be predicted from available information. 
C) Stock prices are not determined by market fundamentals such as supply and demand. 
D) Prices of stocks of different firms in the same industry show no or little tendency to move together.

Question 9

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Accepted Answer

A) 3 years 
B) 3.5 years 
C) 4 years 
D) 4.5 years 
A) 3 years 
B) 3.5 years 
C) 4 years 
D) 4.5 years

Question 10

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Accepted Answer

A) True 
 B)False

Question 11

If a person is risk averse, then she has

Accepted Answer

A) diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B) diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C) increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D) increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
A) diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B) diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C) increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D) increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

Question 12

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Accepted Answer

A) True 
 B)False

Question 13

The future value of a deposit in a savings account will be larger

Accepted Answer

A) the longer a person waits to withdraw the funds. 
B) the higher the interest rate is. 
C) the larger the initial deposit is. 
D) All of the above are correct. 
A) the longer a person waits to withdraw the funds. 
B) the higher the interest rate is. 
C) the larger the initial deposit is. 
D) All of the above are correct.

Question 14

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 15

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

Accepted Answer

A) 10 
B) 14 
C) 17 
D) 20 
A) 10 
B) 14 
C) 17 
D) 20

Question 16

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Accepted Answer

A) $300 paid in two years 
B) $150 paid in one year plus $140 paid in two years 
C) $100 paid today plus $100 paid in one year plus $100 paid in two years 
D) $285 today 
A) $300 paid in two years 
B) $150 paid in one year plus $140 paid in two years 
C) $100 paid today plus $100 paid in one year plus $100 paid in two years 
D) $285 today

Question 17

Which of the following is a source of market risk?

Accepted Answer

A) Holding stocks in many companies carries the risk of a reduced average return. 
B) Real GDP varies over time and sales and profits move with real GDP. 
C) When a paper producer has declining sales, it is likely that so will other paper producers. 
D) If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market. 
A) Holding stocks in many companies carries the risk of a reduced average return. 
B) Real GDP varies over time and sales and profits move with real GDP. 
C) When a paper producer has declining sales, it is likely that so will other paper producers. 
D) If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market.

Question 18

Which of the following actions best illustrates adverse selection?

Accepted Answer

A) A person adds risky stock to his portfolio. 
B) A person who has narrowly avoided many accidents applies for automobile insurance. 
C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently. 
A) A person adds risky stock to his portfolio. 
B) A person who has narrowly avoided many accidents applies for automobile insurance. 
C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D) A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

Question 19

Figure 14-2. The figure shows a utility function for Mary Ann.  
-Refer to Figure 14-2. From the appearance of the utility function, we know that

Accepted Answer

A) if Mary Ann owns a house, she would not consider buying fire insurance. 
B) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D) All of the above are correct. 
A) if Mary Ann owns a house, she would not consider buying fire insurance. 
B) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D) All of the above are correct.

Question 20

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

Accepted Answer

A) 2 percent 
B) 3 percent 
C) 4 percent 
D) 5 percent 
A) 2 percent 
B) 3 percent 
C) 4 percent 
D) 5 percent

Exam 14: The Basic Tools of Finance

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

A bank might make mortgages to people in different regions of the country. By doing so

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

An increase in the number of corporations in a portfolio from 1 to 10 reduces

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Figure 14-2. The figure shows a utility function for Mary Ann. -Refer to Figure 14-2. Suppose the vertical distance between the points (0, A) and (0, B) is 5. If her wealth increased from $1,050 to $1,350, then

In answering which of the following questions would you find it necessary to calculate a present value?

Some people claim that stocks follow a random walk. What does this mean?

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

If a person is risk averse, then she has

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

The future value of a deposit in a savings account will be larger

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

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Which of the following is a source of market risk?

Which of the following actions best illustrates adverse selection?

Figure 14-2. The figure shows a utility function for Mary Ann. -Refer to Figure 14-2. From the appearance of the utility function, we know that

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

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

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

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 Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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