Question 1

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

Accepted Answer

A) True 
 B)False

Question 2

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today.What is the present value of these payments?

Accepted Answer

A)  $2,000/(1 + r)2. 
B)  $1,000 + $1,000/(1 + r) 
C)  $1,000/(1 + r)+ $1,000/(1 + r)2 
D)  $1,000(1 + r)+ $1,000(1 + r)2 
A)  $2,000/(1 + r)2. 
B)  $1,000 + $1,000/(1 + r) 
C)  $1,000/(1 + r)+ $1,000/(1 + r)2 
D)  $1,000(1 + r)+ $1,000(1 + r)2

Question 3

Imagine that someone offers you $100 today or $200 in 10 years.You would prefer to take the $100 today if the interest rate is

Accepted Answer

A)  4 percent. 
B)  5 percent. 
C)  6 percent. 
D)  None of the above are correct. 
A)  4 percent. 
B)  5 percent. 
C)  6 percent. 
D)  None of the above are correct.

Question 4

At which interest rate is the present value of $360 three years from today equal to about $320 today?

Accepted Answer

A)  4 percent 
B)  4.5 percent 
C)  5 percent 
D)  5.5 percent 
A)  4 percent 
B)  4.5 percent 
C)  5 percent 
D)  5.5 percent

Question 5

Which of the following actions best illustrates adverse selection?

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 6

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Diversification can reduce firm-specific risk.

Accepted Answer

A) True 
 B)False

Question 9

As the number of stocks in a portfolio rises,

Accepted Answer

A)  both firm-specific risks and market risk fall. 
B)  firm-specific risks fall;market risk does not. 
C)  market risk falls;firm-specific risks do not. 
D)  neither firm-specific risks nor market risk falls. 
A)  both firm-specific risks and market risk fall. 
B)  firm-specific risks fall;market risk does not. 
C)  market risk falls;firm-specific risks do not. 
D)  neither firm-specific risks nor market risk falls.

Question 10

You are given three options.You may have the balance in an account that has been collecting 5 percent interest for 20 years,the balance in an account that has been collecting 10 percent interest for 10 years,or the balance in an account that has been collecting 20 percent interest for five years.Each account had the same original balance.Which account now has the lowest balance?

Accepted Answer

A)  the first one 
B)  the second one 
C)  the third one 
D)  They all have the same balance. 
A)  the first one 
B)  the second one 
C)  the third one 
D)  They all have the same balance.

Question 11

Discounting 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)  calculations that ignore the phenomenon of compounding for the sake of ease and simplicity. 
D)  decreases in interest rates over time,while compounding refers to increases in interest rates over time. 
A)  finding the present value of a future sum of money. 
B)  finding the future value of a present sum of money. 
C)  calculations that ignore the phenomenon of compounding for the sake of ease and simplicity. 
D)  decreases in interest rates over time,while compounding refers to increases in interest rates over time.

Question 12

What is the present value of a payment of $100 to be made one year from today if the interest rate is 5 percent?

Accepted Answer

A)  $105.26 
B)  $105.00 
C)  $95.24 
D)  $95.00 
A)  $105.26 
B)  $105.00 
C)  $95.24 
D)  $95.00

Question 13

Which of the following is adverse selection?

Accepted Answer

A)  the risk associated with selecting stocks in only a few specific companies 
B)  the risk that a person will become overconfident in his ability to select stocks 
C)  a high-risk person being more likely to apply for insurance 
D)  after obtaining insurance a person having less incentive to be careful 
A)  the risk associated with selecting stocks in only a few specific companies 
B)  the risk that a person will become overconfident in his ability to select stocks 
C)  a high-risk person being more likely to apply for insurance 
D)  after obtaining insurance a person having less incentive to be careful

Question 14

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 15

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Accepted Answer

A) True 
 B)False

Question 16

Risk-averse individuals like good things more than they dislike comparable bad things.

Accepted Answer

A) True 
 B)False

Question 17

The field of finance primarily studies

Accepted Answer

A)  how society manages its scarce resources. 
B)  the implications of time and risk for allocating resources over time. 
C)  firms' decisions concerning how much to produce and what price to charge. 
D)  how society can reduce market risk. 
A)  how society manages its scarce resources. 
B)  the implications of time and risk for allocating resources over time. 
C)  firms' decisions concerning how much to produce and what price to charge. 
D)  how society can reduce market risk.

Question 18

Which of the following is not correct?

Accepted Answer

A)  The higher average return on stocks than on bonds comes at the price of higher risk. 
B)  Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk. 
C)  Insurance markets reduce risk,but not by diversification. 
D)  Risk can be reduced by placing a large number of small bets,rather than a small number of large bets. 
A)  The higher average return on stocks than on bonds comes at the price of higher risk. 
B)  Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk. 
C)  Insurance markets reduce risk,but not by diversification. 
D)  Risk can be reduced by placing a large number of small bets,rather than a small number of large bets.

Question 19

Which of the following is not correct?

Accepted Answer

A)  A risk averse person might be willing to hold stocks. 
B)  Other things the same,a portfolio with the stocks of a large number of companies has less risk. 
C)  Other things the same,the larger a portion of savings a person invests in stocks,the greater his expected return. 
D)  Diversification can eliminate market risk but not firm-specific risk. 
A)  A risk averse person might be willing to hold stocks. 
B)  Other things the same,a portfolio with the stocks of a large number of companies has less risk. 
C)  Other things the same,the larger a portion of savings a person invests in stocks,the greater his expected return. 
D)  Diversification can eliminate market risk but not firm-specific risk.

Question 20

Which of the following is correct concerning diversification?

Accepted Answer

A)  It only reduces firm-specific risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B)  It only reduces firm-specific risk;much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C)  It only reduces market risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D)  None of the above is correct. 
A)  It only reduces firm-specific risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B)  It only reduces firm-specific risk;much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C)  It only reduces market risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D)  None of the above is correct.

Exam 27: The Basic Tools of Finance

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today.What is the present value of these payments?

Imagine that someone offers you $100 today or $200 in 10 years.You would prefer to take the $100 today if the interest rate is

At which interest rate is the present value of $360 three years from today equal to about $320 today?

Which of the following actions best illustrates adverse selection?

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

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

Diversification can reduce firm-specific risk.

As the number of stocks in a portfolio rises,

Discounting refers directly to

What is the present value of a payment of $100 to be made one year from today if the interest rate is 5 percent?

Which of the following is adverse selection?

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

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Risk-averse individuals like good things more than they dislike comparable bad things.

The field of finance primarily studies

Which of the following is not correct?

Which of the following is not correct?

Which of the following is correct concerning diversification?

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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