Question 1

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 2

A person with diminishing marginal utility of wealth is risk averse.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  a decrease 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)  a decrease 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 4

You are expecting to receive $1,000 at some time in the future.Which of the following would unambiguously decrease 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 5

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Accepted Answer

A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall. 
A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall.

Question 6

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

Accepted Answer

A)  market risk. 
B)  moral hazard. 
C)  adverse selection. 
D)  risk aversion. 
A)  market risk. 
B)  moral hazard. 
C)  adverse selection. 
D)  risk aversion.

Question 7

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A)  80 to 100. 
B)  40 to 80. 
C)  10 to 20. 
D)  1 to 10. 
A)  80 to 100. 
B)  40 to 80. 
C)  10 to 20. 
D)  1 to 10.

Question 8

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?

Accepted Answer

A)  $415,000 if the interest rate is 5% 
B)  $419,000 if the interest rate is 4% 
C)  K-Nine would buy the equipment in both cases. 
D)  K-Nine would not buy the equipment in either case. 
A)  $415,000 if the interest rate is 5% 
B)  $419,000 if the interest rate is 4% 
C)  K-Nine would buy the equipment in both cases. 
D)  K-Nine would not buy the equipment in either case.

Question 9

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent

Question 10

Which of the following is correct?

Accepted Answer

A)  Risk-averse people will not hold stock. 
B)  Diversification cannot reduce firm-specific risk. 
C)  The larger the percentage of stock in a portfolio,the greater the risk,but the greater the average return. 
D)  Stock prices are determined by fundamental analysis rather than by supply and demand. 
A)  Risk-averse people will not hold stock. 
B)  Diversification cannot reduce firm-specific risk. 
C)  The larger the percentage of stock in a portfolio,the greater the risk,but the greater the average return. 
D)  Stock prices are determined by fundamental analysis rather than by supply and demand.

Question 11

The utility function of a risk-averse person has a

Accepted Answer

A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases. 
A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases.

Question 12

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

Accepted Answer

A)  $414.09. 
B)  $434.00. 
C)  $441.87. 
D)  $481.24. 
A)  $414.09. 
B)  $434.00. 
C)  $441.87. 
D)  $481.24.

Question 13

On May 25,1978 three pals graduated from high school,pooled together $1,000 and put the money into an account promising to pay 8% for the next 30 years.On May 25,2008 they withdrew all the money from the account.To the nearest dollar,how much did they withdraw?

Accepted Answer

A)  $2,400 
B)  $10,063 
C)  $32,400 
D)  None of the above are correct to the nearest dollar. 
A)  $2,400 
B)  $10,063 
C)  $32,400 
D)  None of the above are correct to the nearest dollar.

Question 14

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Accepted Answer

A)  5 percent 
B)  6 percent 
C)  7 percent 
D)  8 percent 
A)  5 percent 
B)  6 percent 
C)  7 percent 
D)  8 percent

Question 15

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

Accepted Answer

A)  A payment of $1,000 to be received one year from today,with a 8 percent interest rate,has a present value of $945.45. 
B)  A payment of $1,000 to be received one year from today,with a 9 percent interest rate,has a present value of $911.11. 
C)  A payment of $1,000 to be received one year from today,with a 10 percent interest rate,has a present value of $905.06. 
D)  None of the above are correct to the nearest cent. 
A)  A payment of $1,000 to be received one year from today,with a 8 percent interest rate,has a present value of $945.45. 
B)  A payment of $1,000 to be received one year from today,with a 9 percent interest rate,has a present value of $911.11. 
C)  A payment of $1,000 to be received one year from today,with a 10 percent interest rate,has a present value of $905.06. 
D)  None of the above are correct to the nearest cent.

Question 16

Historically,stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Question 17

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Accepted Answer

A)  $180 
B)  $181.82 
C)  $220 
D)  $222.22 
A)  $180 
B)  $181.82 
C)  $220 
D)  $222.22

Question 18

If stock prices follow a random walk,it means

Accepted Answer

A)  long periods of declining prices are followed by long periods of rising prices. 
B)  the greater the number of consecutive days of price declines,the greater the probability prices will increase the following day. 
C)  stock prices are unrelated to random events that shock the economy. 
D)  stock prices are just as likely to rise as to fall at any given time. 
A)  long periods of declining prices are followed by long periods of rising prices. 
B)  the greater the number of consecutive days of price declines,the greater the probability prices will increase the following day. 
C)  stock prices are unrelated to random events that shock the economy. 
D)  stock prices are just as likely to rise as to fall at any given time.

Question 19

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Accepted Answer

A)  5 
B)  7 
C)  9 
D)  11 
A)  5 
B)  7 
C)  9 
D)  11

Question 20

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $370.06?

Accepted Answer

A)  10 
B)  14 
C)  17 
D)  20 
A)  10 
B)  14 
C)  17 
D)  20

Exam 27: The Basic Tools of Finance

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

A person with diminishing marginal utility of wealth is risk averse.

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

You are expecting to receive $1,000 at some time in the future.Which of the following would unambiguously decrease the present value of this future payment?

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Which of the following is correct?

The utility function of a risk-averse person has a

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

On May 25,1978 three pals graduated from high school,pooled together $1,000 and put the money into an account promising to pay 8% for the next 30 years.On May 25,2008 they withdrew all the money from the account.To the nearest dollar,how much did they withdraw?

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

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

Historically,stocks have offered higher rates of return than bonds.

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

If stock prices follow a random walk,it means

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $370.06?

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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