Exam 27: The Basic Tools of Finance

A firm has three different investment options.Option A will give the firm $10 million at the end of one year,$10 million at the end of two years,and $10 million at the end of three years.Option B will give the firm $15 million at the end of one year,$10 million at the end of two years,and $5 million at the end of three years.Option C will give the firm $30 million at the end of one year,and nothing thereafter.Which of these options has the highest present value?

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate.How much money do you have in your account now?

Draw graphs showing the following three relationships. 1.The relation between utility and wealth for a risk averse consumer. 2.The relation between standard deviation and the number of stocks in a portfolio. 3.The relation between return and risk

A manufacturing company is thinking about building a new factory.The factory,if built,will yield the company $300 million in 7 years,and it would cost $220 million today to build.The company will decide to build the factory if the interest rate is

At an annual interest rate of 20 percent,about how many years will it take $100 to triple in value?

Which of the following is correct if the interest rate is 6 percent?

There are many concerns for risk-averse lenders.Consider the following: 1.Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans.2.Lenders are concerned that real GDP will decline leading to reduced corporate profits.3.Lenders are concerned that products produced by certain corporations will become obsolete.

Natasha promises to pay Jennifer $1,000 in two years.If the interest rate is 6 percent,how much is this future payment worth today?

In which of the following instances is the present value of the future payment the largest?

In the 1990s,several stocks had very,very high price to earnings ratios.These stocks appeared overvalued to many observers.What might the people who bought them have been thinking?

Research studies have shown that

The price of a bond is equal to the sum of the present value of its future payments.Suppose a certain bond pays $50 one year from today,and $1,050 two years from today.What is the price of this bond if the interest rate is 5 percent?

Jorge deposited $1,000 into an account three years ago.The first two years he earned 5 percent interest;the third year he earned 6 percent interest.How much money does Jorge have in his account today?

Amanda talks with several different brokers at a social gathering.She hears the following advice from brokers A,B,and C.Which broker,if any,gave her incorrect advice?

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

Samantha deposits $250 into an account and one year later has $270.What interest rate was paid on Samantha's deposit?

What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?

The efficient markets hypothesis says that

You have been promised a payment of $400 in the future.In which case is the present value of this payment highest?

The idea of insurance