Question 1

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

Accepted Answer

A)  A payment of $100 to be received one year from today,with a 2 percent interest rate,has a present value of $98.81. 
B)  A payment of $200 to be received two years from today,with a 3 percent interest rate,has a present value of $188.52. 
C)  A payment of $300 to be received three years from today,with a 4 percent interest rate,has a present value of $234.34. 
D)  None of the above are correct to the nearest cent. 
A)  A payment of $100 to be received one year from today,with a 2 percent interest rate,has a present value of $98.81. 
B)  A payment of $200 to be received two years from today,with a 3 percent interest rate,has a present value of $188.52. 
C)  A payment of $300 to be received three years from today,with a 4 percent interest rate,has a present value of $234.34. 
D)  None of the above are correct to the nearest cent. B

Question 2

John says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest.George says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent.

Accepted Answer

A)  John and George are both correct. 
B)  John and George are both incorrect. 
C)  Only John is correct. 
D)  Only George is correct. 
A)  John and George are both correct. 
B)  John and George are both incorrect. 
C)  Only John is correct. 
D)  Only George is correct. C

Question 3

At which interest rate is the present value of $135.20 two years from today equal to $125 today?

Accepted Answer

A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent 
A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent B

Question 4

Marcus puts a greater proportion of his portfolio into government bonds.Marcus's action

Accepted Answer

A)  increases both risk and the average rate of return. 
B)  decreases both risk and the average rate of return. 
C)  increases risk,but decreases the average rate of return. 
D)  decreases risk,but increases the average rate of return. 
A)  increases both risk and the average rate of return. 
B)  decreases both risk and the average rate of return. 
C)  increases risk,but decreases the average rate of return. 
D)  decreases risk,but increases the average rate of return.

Question 5

A firm has three different investment options,each costing $10 million.Option A will generate $12 million in revenue at the end of one year.Option B will generate $15 million in revenue at the end of two years.Option C will generate $18 million in revenue at the end of three years.Which option should the firm choose?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest,which is not specified here. 
A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest,which is not specified here.

Question 6

Heart's Restaurants considered building a restaurant in a new location.The owners and their accountants decided that this was not the profitable thing to do.However,soon after they made this decision,both the interest rate and the cost of building the restaurant changed.In which case do these changes both make it more likely that they will now build the restaurant?

Accepted Answer

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

Question 7

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 8

Imagine that someone offers you $1,000 today or $X in 7 years.If the interest rate is 4.5 percent,then you would prefer to take the $1,000 today if and only if

Accepted Answer

A)  X < 1,045.00. 
B)  X < 1,188.89. 
C)  X < 1,266.67. 
D)  X < 1,360.86. 
A)  X < 1,045.00. 
B)  X < 1,188.89. 
C)  X < 1,266.67. 
D)  X < 1,360.86.

Question 9

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 10

In which of the following games is it conceivable that a risk-averse person might be willing to play?

Accepted Answer

A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct. 
A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct.

Question 11

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 12

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A)  The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B)  The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C)  The insurance requirement is designed primarily to reduce adverse selection;the credit check is designed primarily to reduce the risk of moral hazard. 
D)  The insurance requirement is designed primarily to reduce the risk of moral hazard;the credit check is designed primarily to reduce adverse selection. 
A)  The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B)  The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C)  The insurance requirement is designed primarily to reduce adverse selection;the credit check is designed primarily to reduce the risk of moral hazard. 
D)  The insurance requirement is designed primarily to reduce the risk of moral hazard;the credit check is designed primarily to reduce adverse selection.

Question 13

Over the past two centuries,the average annual rates of return were about

Accepted Answer

A)  5 percent for stocks and about 1.5 percent for short-term government bonds. 
B)  6 percent for stocks and about 2.5 percent for short-term government bonds. 
C)  8 percent for stocks and about 3 percent for short-term government bonds. 
D)  None of the above is correct. 
A)  5 percent for stocks and about 1.5 percent for short-term government bonds. 
B)  6 percent for stocks and about 2.5 percent for short-term government bonds. 
C)  8 percent for stocks and about 3 percent for short-term government bonds. 
D)  None of the above is correct.

Question 14

If you put $300 into an account paying 2 percent interest,what will be the value of this account in 4 years?

Accepted Answer

A)  $320.69 
B)  $324.00 
C)  $324.73 
D)  $327.81 
A)  $320.69 
B)  $324.00 
C)  $324.73 
D)  $327.81

Question 15

As the number of stocks in a person's portfolio increases,

Accepted Answer

A)  the risk of the portfolio increases,as indicated by the increasing value of the standard deviation of the portfolio. 
B)  the risk of the portfolio increases,as indicated by the decreasing value of the standard deviation of the portfolio. 
C)  the risk of the portfolio decreases,as indicated by the increasing value of the standard deviation of the portfolio. 
D)  the risk of the portfolio decreases,as indicated by the decreasing value of the standard deviation of the portfolio. 
A)  the risk of the portfolio increases,as indicated by the increasing value of the standard deviation of the portfolio. 
B)  the risk of the portfolio increases,as indicated by the decreasing value of the standard deviation of the portfolio. 
C)  the risk of the portfolio decreases,as indicated by the increasing value of the standard deviation of the portfolio. 
D)  the risk of the portfolio decreases,as indicated by the decreasing value of the standard deviation of the portfolio.

Question 16

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

Accepted Answer

A)  2 percent,but not if the interest rate is 3 percent. 
B)  3 percent,but not if the interest rate is 4 percent. 
C)  4 percent,but not if the interest rate is 5 percent. 
D)  5 percent,but not if the interest rate is 6 percent. 
A)  2 percent,but not if the interest rate is 3 percent. 
B)  3 percent,but not if the interest rate is 4 percent. 
C)  4 percent,but not if the interest rate is 5 percent. 
D)  5 percent,but not if the interest rate is 6 percent.

Question 17

Jeff put $75 into an account and one year later had $100.What interest rate was paid on Jeff's deposit?

Accepted Answer

A)  20 percent 
B)  25 percent 
C)  28 percent 
D)  None of the above is correct. 
A)  20 percent 
B)  25 percent 
C)  28 percent 
D)  None of the above is correct.

Question 18

A judge requires Harry to make a payment to Sally.The judge says that Harry can pay her either $10,000 today or $11,000 two years from today.Of the following interest rates,which is the highest one at which Harry would be better off paying the money today?

Accepted Answer

A)  3 percent 
B)  4 percent 
C)  5 percent 
D)  6 percent 
A)  3 percent 
B)  4 percent 
C)  5 percent 
D)  6 percent

Question 19

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

Accepted Answer

A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.5 years 
A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.5 years

Question 20

According to the efficient markets hypothesis,worse-than-expected news about a corporation will

Accepted Answer

A)  have no effect on its stock price. 
B)  raise the price of the stock. 
C)  lower the price of the stock. 
D)  change the price of the stock in a random direction. 
A)  have no effect on its stock price. 
B)  raise the price of the stock. 
C)  lower the price of the stock. 
D)  change the price of the stock in a random direction.

Exam 27: The Basic Tools of Finance

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

At which interest rate is the present value of $135.20 two years from today equal to $125 today?

Marcus puts a greater proportion of his portfolio into government bonds.Marcus's action

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?

Imagine that someone offers you $1,000 today or $X in 7 years.If the interest rate is 4.5 percent,then you would prefer to take the $1,000 today if and only if

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?

In which of the following games is it conceivable that a risk-averse person might be willing to play?

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.

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Over the past two centuries,the average annual rates of return were about

If you put $300 into an account paying 2 percent interest,what will be the value of this account in 4 years?

As the number of stocks in a person's portfolio increases,

Jeff put $75 into an account and one year later had $100.What interest rate was paid on Jeff's deposit?

A judge requires Harry to make a payment to Sally.The judge says that Harry can pay her either $10,000 today or $11,000 two years from today.Of the following interest rates,which is the highest one at which Harry would be better off paying the money today?

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

According to the efficient markets hypothesis,worse-than-expected news about a corporation will

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

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

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 Macroeconomics: Basic Concepts

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

Five Debates Over Macroeconomic Policy

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