Exam 14: The Basic Tools of Finance

Belinda knows that she has about $95 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

The utility function of a risk-averse person has a

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Consider the following two situations. Nicole accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Braden buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Suppose you win a small lottery and you are given the following choice: You can (1) receive an immediate payment of $10,000 or (2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you'd use on your own car.

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

As the number of stocks in a portfolio rises,

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Risk aversion simply means that people dislike bad things to happen.

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?