Exam 14: The Basic Tools of Finance

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

In general, as a person includes fewer stocks and more bonds in his portfolio,

Brittany wants to have about $500,000 when she retires in 10 years. She has $200,000 to deposit now. At which of the following interest rates would her deposit come closest to $500,000 after 10 years?

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $998.25 in your account. If your accountant is correct, what is the current interest rate?

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Lucky Hardware Store considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?

Diversification

Risk aversion helps to explain various things we observe in the economy, including

Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

The market for insurance is an example of diversification.