Question 1

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

Accepted Answer

A) about 3.5 years 
B) about 6.3 years 
C) about 12 years 
D) about 14 years 
A) about 3.5 years 
B) about 6.3 years 
C) about 12 years 
D) about 14 years

Question 2

Dividends

Accepted Answer

A) are the rates of return on mutual funds. 
B) are cash payments that companies make to shareholders. 
C) are the difference between the price and present value per share of a stock. 
D) are the rates of return on a company's capital stock. 
A) are the rates of return on mutual funds. 
B) are cash payments that companies make to shareholders. 
C) are the difference between the price and present value per share of a stock. 
D) are the rates of return on a company's capital stock.

Question 3

Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay

Accepted Answer

A) $140,000, but not $150,000. 
B) $150,000, but not $160,000. 
C) $160,000, but not $170,000. 
D) $170,000, but not $180,000. 
A) $140,000, but not $150,000. 
B) $150,000, but not $160,000. 
C) $160,000, but not $170,000. 
D) $170,000, but not $180,000.

Question 4

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Accepted Answer

A) True 
 B)False

Question 5

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

Accepted Answer

A) 3 percent 
B) 5 percent 
C) 7 percent 
D) 9 percent 
A) 3 percent 
B) 5 percent 
C) 7 percent 
D) 9 percent

Question 6

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Accepted Answer

A) True 
 B)False

Question 7

From the standpoint of the economy as a whole, the role of

Accepted Answer

A) the interest rate is to make sure that the price of bonds increases over time. 
B) diversification is to eliminate market risk. 
C) insurance is to reduce the risks inherent in life. 
D) insurance is to spread risks around more efficiently. 
A) the interest rate is to make sure that the price of bonds increases over time. 
B) diversification is to eliminate market risk. 
C) insurance is to reduce the risks inherent in life. 
D) insurance is to spread risks around more efficiently.

Question 8

Roger determines that if Aim Corporation has high revenues, then Zest Corporation will have low revenues, and that if Aim Corporation has low revenues, Zest Corporation will have high revenues. He buys stock in both corporations.

Accepted Answer

A) He has reduced firm-specific risk but not market risk. 
B) He has reduced market risk, but not firm-specific risk. 
C) He had reduce both firm-specific risk and market risk. 
D) He has reduced neither firm-specific risk nor market risk. 
A) He has reduced firm-specific risk but not market risk. 
B) He has reduced market risk, but not firm-specific risk. 
C) He had reduce both firm-specific risk and market risk. 
D) He has reduced neither firm-specific risk nor market risk.

Question 9

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) Mary Ann is risk averse. 
B) Mary Ann gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C) the property of diminishing marginal utility applies to Mary Ann. 
D) All of the above are correct. 
A) Mary Ann is risk averse. 
B) Mary Ann gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C) the property of diminishing marginal utility applies to Mary Ann. 
D) All of the above are correct.

Question 10

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Accepted Answer

A) $210 
B) $220 
C) $240 
D) $250 
A) $210 
B) $220 
C) $240 
D) $250

Question 11

According to the efficient market hypothesis

Accepted Answer

A) changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds. 
B) changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds. 
C) changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds. 
D) changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds. 
A) changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds. 
B) changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds. 
C) changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds. 
D) changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.

Question 12

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Accepted Answer

A) Interest rates rise and you get the payment sooner. 
B) Interest rates rise and you have to wait longer for the payment. 
C) Interest rates fall and you get the payment sooner. 
D) Interest rates fall and you have to wait longer to get the payment. 
A) Interest rates rise and you get the payment sooner. 
B) Interest rates rise and you have to wait longer for the payment. 
C) Interest rates fall and you get the payment sooner. 
D) Interest rates fall and you have to wait longer to get the payment.

Question 13

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Accepted Answer

A) has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B) almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C) is spending his or her time wisely if the efficient markets hypothesis is correct. 
D) is interested in the likely ability of a corporation to pay dividends in the future. 
A) has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B) almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C) is spending his or her time wisely if the efficient markets hypothesis is correct. 
D) is interested in the likely ability of a corporation to pay dividends in the future.

Question 14

If Robert is risk-averse, then he will always

Accepted Answer

A) choose not to play a game where he has a 50 percent chance of winning $1 and a 50 percent chance of losing $1. 
B) choose not to play a game where he has a 75 percent chance of winning $1 and a 25 percent chance of losing $1. 
C) choose to play a game where he has a 52 percent chance of winning $1 and a 48 percent chance of losing $1. 
D) All of the above are correct. 
A) choose not to play a game where he has a 50 percent chance of winning $1 and a 50 percent chance of losing $1. 
B) choose not to play a game where he has a 75 percent chance of winning $1 and a 25 percent chance of losing $1. 
C) choose to play a game where he has a 52 percent chance of winning $1 and a 48 percent chance of losing $1. 
D) All of the above are correct.

Question 15

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Accepted Answer

A) about 6.3 years 
B) about 7 years 
C) about 7.7 years 
D) about 10 years 
A) about 6.3 years 
B) about 7 years 
C) about 7.7 years 
D) about 10 years

Question 16

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

Accepted Answer

A) True 
 B)False

Question 17

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Accepted Answer

A) True 
 B)False

Question 18

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Accepted Answer

For example at 3 percent the p

Question 19

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A) "random walk" 
B) "random bubble" 
C) "speculative bubble" 
D) "speculative hedge" 
A) "random walk" 
B) "random bubble" 
C) "speculative bubble" 
D) "speculative hedge"

Question 20

Hardwood Furniture Store considered building a store in a new location. The owners and their accountants decided that this was 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 less likely that they will now build the store?

Accepted Answer

A) Interest rates rise and the cost of building the store rises. 
B) Interest rates rise and the cost of building the store falls. 
C) Interest rates fall and the cost of building the store rises. 
D) Interest rates fall and the cost of building the store falls. 
A) Interest rates rise and the cost of building the store rises. 
B) Interest rates rise and the cost of building the store falls. 
C) Interest rates fall and the cost of building the store rises. 
D) Interest rates fall and the cost of building the store falls.

Exam 14: The Basic Tools of Finance

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

Dividends

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

From the standpoint of the economy as a whole, the role of

Roger determines that if Aim Corporation has high revenues, then Zest Corporation will have low revenues, and that if Aim Corporation has low revenues, Zest Corporation will have high revenues. He buys stock in both corporations.

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

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

According to the efficient market hypothesis

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

If Robert is risk-averse, then he will always

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

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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