Question 1

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Accepted Answer

A) an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B) an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C) an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D) an interest rate of 4.5 percent, with no processing fee and no bonus 
A) an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B) an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C) an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D) an interest rate of 4.5 percent, with no processing fee and no bonus

Question 2

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Accepted Answer

A) 4 percent 
B) 5 percent 
C) 6 percent 
D) None of the above would give a present value within a cent of $162.24. 
A) 4 percent 
B) 5 percent 
C) 6 percent 
D) None of the above would give a present value within a cent of $162.24.

Question 3

Which of the following make(s) insurance premiums higher than otherwise?

Accepted Answer

A) adverse selection and moral hazard 
B) adverse selection, but not moral hazard 
C) moral hazard, but not adverse selection 
D) neither adverse selection nor moral hazard 
A) adverse selection and moral hazard 
B) adverse selection, but not moral hazard 
C) moral hazard, but not adverse selection 
D) neither adverse selection nor moral hazard

Question 4

If asset markets are driven by the "animal spirits" of investors, then

Accepted Answer

A) those markets reflect rational behavior. 
B) those markets reflect irrational behavior. 
C) the efficient markets hypothesis is correct. 
D) the stock market exhibits informational efficiency. 
A) those markets reflect rational behavior. 
B) those markets reflect irrational behavior. 
C) the efficient markets hypothesis is correct. 
D) the stock market exhibits informational efficiency.

Question 5

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Accepted Answer

A) $1,000(1.06) 
B) $1,000(1.06) 
C) $1,000/(1.06) 
D) None of the above is correct. 
A) $1,000(1.06) 
B) $1,000(1.06) 
C) $1,000/(1.06) 
D) None of the above is correct.

Question 6

The concept of present value helps explain why

Accepted Answer

A) investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B) investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C) the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D) None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases. 
A) investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B) investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C) the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D) None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

Question 7

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Accepted Answer

A) $1,160.00 
B) $1,166.40 
C) $1,168.65 
D) $1,169.64 
A) $1,160.00 
B) $1,166.40 
C) $1,168.65 
D) $1,169.64

Question 8

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38. What rate of interest did Robert earn?

Accepted Answer

A) 4.5 percent 
B) 5.5 percent 
C) 6.5 percent 
D) 8.0 percent 
A) 4.5 percent 
B) 5.5 percent 
C) 6.5 percent 
D) 8.0 percent

Question 9

Which of the following is correct concerning diversification?

Accepted Answer

A) It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B) It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C) It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D) None of the above is correct. 
A) It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B) It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C) It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D) None of the above is correct.

Question 10

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 11

The market for insurance is one example of reducing risk by using diversification.

Accepted Answer

A) True 
 B)False

Question 12

Figure 14-1. The figure shows a utility function.  
-Refer to Figure 14-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A) the distance between the origin and point B 
B) the distance between the origin and point C 
C) the distance between point A and point C 
D) the distance between point B and point C 
A) the distance between the origin and point B 
B) the distance between the origin and point C 
C) the distance between point A and point C 
D) the distance between point B and point C

Question 13

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 14

Diversification can reduce firm-specific risk.

Accepted Answer

A) True 
 B)False

Question 15

Suppose that interest rates unexpectedly rise and that Carter Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of Carter Corporation Stock fall?

Accepted Answer

A) both the interest rate rising and the revenue announcement 
B) neither the interest rate rising nor the revenue announcement 
C) only the interest rate rising 
D) only the revenue announcement 
A) both the interest rate rising and the revenue announcement 
B) neither the interest rate rising nor the revenue announcement 
C) only the interest rate rising 
D) only the revenue announcement

Question 16

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Accepted Answer

A) $2,000/(1 + r)2. 
B) $1,000 + $1,000/(1 + r) 
C) $1,000/(1 + r) + $1,000/(1 + r)2 
D) $1,000(1 + r) + $1,000(1 + r)2 
A) $2,000/(1 + r)2. 
B) $1,000 + $1,000/(1 + r) 
C) $1,000/(1 + r) + $1,000/(1 + r)2 
D) $1,000(1 + r) + $1,000(1 + r)2

Question 17

The performance of index funds

Accepted Answer

A) usually falls short of the performance of actively-managed funds. 
B) provides evidence in support of the notion that stock prices do not depend upon supply and demand. 
C) provides evidence in support of the efficient markets hypothesis. 
D) provides evidence in support of the notion that stock-market participants are irrational. 
A) usually falls short of the performance of actively-managed funds. 
B) provides evidence in support of the notion that stock prices do not depend upon supply and demand. 
C) provides evidence in support of the efficient markets hypothesis. 
D) provides evidence in support of the notion that stock-market participants are irrational.

Question 18

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

A) True 
 B)False

Question 19

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Accepted Answer

A) and marginal utility function are both upward sloping. 
B) and marginal utility function are both downward sloping. 
C) is upward sloping and her marginal utility function is downward sloping. 
D) is downward sloping and her marginal utility function is upward sloping. 
A) and marginal utility function are both upward sloping. 
B) and marginal utility function are both downward sloping. 
C) is upward sloping and her marginal utility function is downward sloping. 
D) is downward sloping and her marginal utility function is upward sloping.

Question 20

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Accepted Answer

A) $972.00 
B) $973.44 
C) $974.19 
D) None of the above is correct. 
A) $972.00 
B) $973.44 
C) $974.19 
D) None of the above is correct.

Exam 14: The Basic Tools of Finance

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Which of the following make(s) insurance premiums higher than otherwise?

If asset markets are driven by the "animal spirits" of investors, then

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

The concept of present value helps explain why

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38. What rate of interest did Robert earn?

Which of the following is correct concerning diversification?

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

The market for insurance is one example of reducing risk by using diversification.

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Diversification can reduce firm-specific risk.

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

The performance of index funds

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

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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