Question 1

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Accepted Answer

A) $414.09. 
B) $434.00. 
C) $441.87. 
D) $481.24. 
A) $414.09. 
B) $434.00. 
C) $441.87. 
D) $481.24.

Question 2

Which of the following statements is correct?

Accepted Answer

A) A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B) A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C) Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D) Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection. 
A) A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B) A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C) Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D) Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection.

Question 3

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Accepted Answer

A) Option 1; Option 2; Option 3 
B) Option 3; Option 2; Option 1 
C) Option 2; Option 3; Option 1 
D) Option 3; Option 1; Option 2 
A) Option 1; Option 2; Option 3 
B) Option 3; Option 2; Option 1 
C) Option 2; Option 3; Option 1 
D) Option 3; Option 1; Option 2

Question 4

Cleo promises to pay Jacques $1,000 in two years. If the interest rate is 6 percent, how much is this future payment worth today?

Accepted Answer

A) $883.60 
B) $887.97 
C) $890.00 
D) None of the above are correct to the nearest cent. 
A) $883.60 
B) $887.97 
C) $890.00 
D) None of the above are correct to the nearest cent.

Question 5

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A) raise the price and raise the present value of the corporation's stock. 
B) raise the price and lower the present value of the corporation's stock. 
C) lower the price and raise the present value of the corporation's stock. 
D) lower the price and lower the present value of the corporation's stock. 
A) raise the price and raise the present value of the corporation's stock. 
B) raise the price and lower the present value of the corporation's stock. 
C) lower the price and raise the present value of the corporation's stock. 
D) lower the price and lower the present value of the corporation's stock.

Question 6

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Accepted Answer

A) 5 percent 
B) 7 percent 
C) 10 percent 
D) 14 percent 
A) 5 percent 
B) 7 percent 
C) 10 percent 
D) 14 percent

Question 7

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

Accepted Answer

A) option A. 
B) option B. 
C) option C. 
D) either A or B because they are the same to her. 
A) option A. 
B) option B. 
C) option C. 
D) either A or B because they are the same to her.

Question 8

Which of the following changes would decrease the present value of a future payment?

Accepted Answer

A) a decrease in the size of the payment 
B) an increase in the time until the payment is made 
C) an increase in the interest rate 
D) All of the above are correct. 
A) a decrease in the size of the payment 
B) an increase in the time until the payment is made 
C) an increase in the interest rate 
D) All of the above are correct.

Question 9

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

Accepted Answer

A) 5 
B) 7 
C) 9 
D) 11 
A) 5 
B) 7 
C) 9 
D) 11

Question 10

Which of the following is the largest?

Accepted Answer

A) the future value of $250 with 3% interest for 2 years 
B) the future value of $250 at 2% interest for 3 years 
C) the present value of $250 to be paid in two years when the interest rate is 3% 
D) the present value of $250 to be paid in three years when the interest rate is 2% 
A) the future value of $250 with 3% interest for 2 years 
B) the future value of $250 at 2% interest for 3 years 
C) the present value of $250 to be paid in two years when the interest rate is 3% 
D) the present value of $250 to be paid in three years when the interest rate is 2%

Question 11

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Accepted Answer

A)  $$\$ 400 \times 6 \times ( 1.05 )$$ 
B) 
$$\$ 400 \times ( 1.05 ) ^ { 6 }$$ 
C) 
$$\$ 400 \times ( 1.30 )$$ 
D) 
$$\$ 400 \times \left( 1 + .05 ^ { 6 } \right)$$ 
A)  $$\$ 400 \times 6 \times ( 1.05 )$$ 
B) 
$$\$ 400 \times ( 1.05 ) ^ { 6 }$$ 
C) 
$$\$ 400 \times ( 1.30 )$$ 
D) 
$$\$ 400 \times \left( 1 + .05 ^ { 6 } \right)$$

Question 12

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces

Question 13

If a person is risk averse, then as wealth increases, total utility of wealth

Accepted Answer

A) increases at an increasing rate. 
B) increases at a decreasing rate. 
C) decreases at an increasing rate. 
D) decreases at a decreasing rate. 
A) increases at an increasing rate. 
B) increases at a decreasing rate. 
C) decreases at an increasing rate. 
D) decreases at a decreasing rate.

Question 14

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

Accepted Answer

There are several possibilities. The fir

Question 15

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $3,738.54. What is the number of years, N?

Accepted Answer

A) 4 
B) 5 
C) 6 
D) 7 
A) 4 
B) 5 
C) 6 
D) 7

Question 16

Which, if any, of the present values below are correctly computed?

Accepted Answer

A) A payment of $1,000 to be received one year from today, with a 8 percent interest rate, has a present value of $945.45. 
B) A payment of $1,000 to be received one year from today, with a 9 percent interest rate, has a present value of $911.11. 
C) A payment of $1,000 to be received one year from today, with a 10 percent interest rate, has a present value of $905.06. 
D) None of the above are correct to the nearest cent. 
A) A payment of $1,000 to be received one year from today, with a 8 percent interest rate, has a present value of $945.45. 
B) A payment of $1,000 to be received one year from today, with a 9 percent interest rate, has a present value of $911.11. 
C) A payment of $1,000 to be received one year from today, with a 10 percent interest rate, has a present value of $905.06. 
D) None of the above are correct to the nearest cent.

Question 17

Diversifying

Accepted Answer

A) increases the standard deviation of the value of a portfolio indicating its risk has increased. 
B) increases the standard deviation of the value of a portfolio indicating its risk has decreased. 
C) decreases the standard deviation of the value of a portfolio indicating its risk has increased. 
D) decreases the standard deviation of the value of a portfolio indicating its risk has decreased. 
A) increases the standard deviation of the value of a portfolio indicating its risk has increased. 
B) increases the standard deviation of the value of a portfolio indicating its risk has decreased. 
C) decreases the standard deviation of the value of a portfolio indicating its risk has increased. 
D) decreases the standard deviation of the value of a portfolio indicating its risk has decreased.

Question 18

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Accepted Answer

A) the efficient markets hypothesis is not a correct hypothesis. 
B) the stock market is informationally efficient. 
C) the stock market is informationally inefficient. 
D) there is no reason to establish a diversified portfolio of stocks. 
A) the efficient markets hypothesis is not a correct hypothesis. 
B) the stock market is informationally efficient. 
C) the stock market is informationally inefficient. 
D) there is no reason to establish a diversified portfolio of stocks.

Question 19

Which of the following has the highest future value?

Accepted Answer

A) $100 saved for 2 years at 10 percent interest 
B) $110 saved for 2 years at 9 percent interest 
C) $120 saved for 2 years at 8 percent interest 
D) $130 saved for 2 years at 7 percent interest 
A) $100 saved for 2 years at 10 percent interest 
B) $110 saved for 2 years at 9 percent interest 
C) $120 saved for 2 years at 8 percent interest 
D) $130 saved for 2 years at 7 percent interest

Question 20

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Accepted Answer

A) $2,000(1.06) 
B) $1,000 + $(1.06)2 
C) $1,000(1.06)2 
D) None of the above are correct. 
A) $2,000(1.06) 
B) $1,000 + $(1.06)2 
C) $1,000(1.06)2 
D) None of the above are correct.

Exam 14: The Basic Tools of Finance

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Which of the following statements is correct?

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Cleo promises to pay Jacques $1,000 in two years. If the interest rate is 6 percent, how much is this future payment worth today?

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Which of the following changes would decrease the present value of a future payment?

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

Which of the following is the largest?

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

If a person is risk averse, then as wealth increases, total utility of wealth

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $3,738.54. What is the number of years, N?

Which, if any, of the present values below are correctly computed?

Diversifying

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Which of the following has the highest future value?

If you put $1,000 in the bank today at an interest rate of 6% what is its value in 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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