Question 1

Compounding refers directly to

Accepted Answer

A) finding the present value of a future sum of money. 
B) finding the future value of a present sum of money. 
C) changes in the interest rate over time on a bank account or a similar savings vehicle. 
D) interest being earned on previously-earned interest. 
A) finding the present value of a future sum of money. 
B) finding the future value of a present sum of money. 
C) changes in the interest rate over time on a bank account or a similar savings vehicle. 
D) interest being earned on previously-earned interest.

Question 2

Fundamental analysis shows that Moonlight Company is fairly valued. Then Moonlight Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful tea producer. Suppose this has no effect on the price of the stock of Moonlight Company.

Accepted Answer

A) Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B) Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C) Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D) Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
A) Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B) Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C) Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D) Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Question 3

Albert Einstein once referred to compounding as

Accepted Answer

A) "an obsession among economists that defies explanation." 
B) "the greatest mathematical discovery of all time." 
C) his own discovery. 
D) John Maynard Keynes's greatest contribution. 
A) "an obsession among economists that defies explanation." 
B) "the greatest mathematical discovery of all time." 
C) his own discovery. 
D) John Maynard Keynes's greatest contribution.

Question 4

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Accepted Answer

A) rise, and investment spending rise. 
B) rise, and investment spending fall. 
C) fall, and investment spending rise. 
D) fall, and investment spending fall. 
A) rise, and investment spending rise. 
B) rise, and investment spending fall. 
C) fall, and investment spending rise. 
D) fall, and investment spending fall.

Question 5

Figure 14-3. The figure shows a utility function for Rob.  
-Refer to Figure 14-3. If most people's utility functions look like Rob's utility function, then it is easy to explain why

Accepted Answer

A) people buy various types of insurance. 
B) we observe a trade-off between risk and return. 
C) most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets. 
D) None of the above are correct. 
A) people buy various types of insurance. 
B) we observe a trade-off between risk and return. 
C) most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets. 
D) None of the above are correct.

Question 6

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Accepted Answer

A) True 
 B)False

Question 7

Figure 14-5. On the graph, x represents risk and y represents return.  
-Refer to Figure 14-5. Which of the following statements is correct?

Accepted Answer

A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk, the greater the return. 
A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk, the greater the return.

Question 8

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 9

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Accepted Answer

A) This stock is overvalued; you should consider adding it to your portfolio. 
B) This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued; you should consider adding it to your portfolio. 
D) This stock is undervalued; you shouldn't consider adding it to your portfolio. 
A) This stock is overvalued; you should consider adding it to your portfolio. 
B) This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C) This stock is undervalued; you should consider adding it to your portfolio. 
D) This stock is undervalued; you shouldn't consider adding it to your portfolio.

Question 10

Which of the following actions best illustrates moral hazard?

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 11

Research studies have shown that

Accepted Answer

A) the correlation between how well a stock does one year and how well it does the next is significantly greater than zero. 
B) managed mutual funds generally outperform indexed mutual funds. 
C) people tend to be overconfident when making investment decisions. 
D) All of the above are correct. 
A) the correlation between how well a stock does one year and how well it does the next is significantly greater than zero. 
B) managed mutual funds generally outperform indexed mutual funds. 
C) people tend to be overconfident when making investment decisions. 
D) All of the above are correct.

Question 12

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Accepted Answer

A) 5 percent 
B) 6 percent 
C) 7 percent 
D) 8 percent 
A) 5 percent 
B) 6 percent 
C) 7 percent 
D) 8 percent

Question 13

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Accepted Answer

A) 9% but not 10% 
B) 10% but not 11% 
C) 11% but not 12% 
D) None of the above is correct; a risk averse person would not accept any of the above bets. 
A) 9% but not 10% 
B) 10% but not 11% 
C) 11% but not 12% 
D) None of the above is correct; a risk averse person would not accept any of the above bets.

Question 14

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

Accepted Answer

A) 5 percent 
B) 6 percent 
C) 7 percent 
D) 8 percent 
A) 5 percent 
B) 6 percent 
C) 7 percent 
D) 8 percent

Question 15

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

Accepted Answer

A) an increase 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) an increase 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 16

Figure 14-1. The figure shows a utility function.  
-Refer to Figure 14-1. What is measured along the vertical axis?

Accepted Answer

A) risk aversion 
B) marginal utility 
C) utility 
D) the number of units of a good that can be purchased 
A) risk aversion 
B) marginal utility 
C) utility 
D) the number of units of a good that can be purchased

Question 17

Suppose you are deciding whether or not to buy a particular bond for $2,990.08. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $5,000. You will buy the bond today if the interest rate is

Accepted Answer

A) no less than 9.48 percent. 
B) no greater than 9.48 percent. 
C) no less than 10.83 percent. 
D) no greater than 10.83 percent. 
A) no less than 9.48 percent. 
B) no greater than 9.48 percent. 
C) no less than 10.83 percent. 
D) no greater than 10.83 percent.

Question 18

For a risk averse person,

Accepted Answer

A) the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C) the utility function exhibits the property of increasing marginal utility. 
D) the utility function gets steeper as wealth increases. 
A) the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B) the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C) the utility function exhibits the property of increasing marginal utility. 
D) the utility function gets steeper as wealth increases.

Question 19

Historically, stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Question 20

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

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

Exam 14: The Basic Tools of Finance

Compounding refers directly to

Fundamental analysis shows that Moonlight Company is fairly valued. Then Moonlight Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful tea producer. Suppose this has no effect on the price of the stock of Moonlight Company.

Albert Einstein once referred to compounding as

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Figure 14-3. The figure shows a utility function for Rob. -Refer to Figure 14-3. If most people's utility functions look like Rob's utility function, then it is easy to explain why

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Figure 14-5. On the graph, x represents risk and y represents return. -Refer to Figure 14-5. Which of the following statements is correct?

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Which of the following actions best illustrates moral hazard?

Research studies have shown that

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

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

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. What is measured along the vertical axis?

Suppose you are deciding whether or not to buy a particular bond for $2,990.08. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $5,000. You will buy the bond today if the interest rate is

For a risk averse person,

Historically, stocks have offered higher rates of return than bonds.

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

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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