Question 1

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

Accepted Answer

A)  $100 today plus $190 one year from today 
B)  $150 today plus $140 one year from today 
C)  $200 today plus $90 one year from today 
D)  $250 today plus $40 one year from today 
A)  $100 today plus $190 one year from today 
B)  $150 today plus $140 one year from today 
C)  $200 today plus $90 one year from today 
D)  $250 today plus $40 one year from today

Question 2

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Accepted Answer

A)  raise the price of the corporation's stock; if it does not the stock is overvalued. 
B)  raise the price of the corporation's stock; if it does not the stock is undervalued. 
C)  reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D)  reduce the price of the corporation's stock; if it does not the stock is undervalued. 
A)  raise the price of the corporation's stock; if it does not the stock is overvalued. 
B)  raise the price of the corporation's stock; if it does not the stock is undervalued. 
C)  reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D)  reduce the price of the corporation's stock; if it does not the stock is undervalued.

Question 3

At which interest rate is the present value of $360 three years from today equal to about $310 today?

Accepted Answer

A)  4.7 percent 
B)  5.1 percent 
C)  5.5 percent 
D)  5.9 percent 
A)  4.7 percent 
B)  5.1 percent 
C)  5.5 percent 
D)  5.9 percent

Question 4

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Accepted Answer

Efficient market theory says that it sho

Question 5

David's Utility Function
 
If David's current wealth is $61,000, then

Accepted Answer

A)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk averse. 
B)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not risk averse. 
C)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is risk averse. 
D)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is not risk averse. 
A)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk averse. 
B)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not risk averse. 
C)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is risk averse. 
D)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is not risk averse.

Question 6

Which of the following makes) insurance premiums higher than otherwise?

Accepted Answer

A)  adverse selection and moral hazard 
B)  adverse selection, but not moral hazard 
C)  moral hazard, but not adverse selection 
D)  neither adverse selection nor moral hazard 
A)  adverse selection and moral hazard 
B)  adverse selection, but not moral hazard 
C)  moral hazard, but not adverse selection 
D)  neither adverse selection nor moral hazard

Question 7

Why might someone be willing to pay more than the fundamental value for a stock?

Accepted Answer

She may believe that

Question 8

Scenario 27-1
Lisa has a utility function   where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Lisa receives from

Question 9

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 10

Scenario 27-2
Suppose Dave has a utility function   where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability 1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?

Accepted Answer

Dave will prefer option B if t

Question 11

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Accepted Answer

A)  $8,225.06. 
B)  $7,920.94. 
C)  $7,672.58. 
D)  $6,998.98. 
A)  $8,225.06. 
B)  $7,920.94. 
C)  $7,672.58. 
D)  $6,998.98.

Question 12

Scenario 27-2
Suppose Dave has a utility function   where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Is Dave risk averse? Explain.

Accepted Answer

Yes, Dave is risk averse. The

Question 13

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.

Accepted Answer

A)  This stock is overvalued; you should consider adding it to your portfolio. 
B)  This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued; you should consider adding it to your portfolio. 
D)  This stock is undervalued; you shouldn't consider adding it to your portfolio. 
A)  This stock is overvalued; you should consider adding it to your portfolio. 
B)  This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued; you should consider adding it to your portfolio. 
D)  This stock is undervalued; you shouldn't consider adding it to your portfolio.

Question 14

Which of the following games might a risk-averse person play?

Accepted Answer

A)  a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B)  a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D)  a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1 
A)  a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B)  a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D)  a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1

Question 15

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall. 
A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall.

Question 16

Some people argue that there are two advantages to holding mutual funds. The first is that mutual funds provide an inexpensive way to hold a diversified portfolio. The second is that because of their expertise mutual fund managers should be able to consistently beat the market. Which of the following does the evidence show?

Accepted Answer

A)  Diversification does reduce risk and mutual funds typically outperform the market. 
B)  Diversification does reduce risk, but mutual funds do not typically outperform the market. 
C)  Diversification does not reduce risk but mutual funds typically outperform the market. 
D)  Diversification does not reduce risk and mutual funds do not typically outperform the market. 
A)  Diversification does reduce risk and mutual funds typically outperform the market. 
B)  Diversification does reduce risk, but mutual funds do not typically outperform the market. 
C)  Diversification does not reduce risk but mutual funds typically outperform the market. 
D)  Diversification does not reduce risk and mutual funds do not typically outperform the market.

Question 17

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Accepted Answer

A)  $285.83 
B)  $236.98 
C)  $202.04 
D)  $145.65 
A)  $285.83 
B)  $236.98 
C)  $202.04 
D)  $145.65

Question 18

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Accepted Answer

A)  $3,494.40 
B)  $3,585.85 
C)  $3,601.89 
D)  $3,676.14 
A)  $3,494.40 
B)  $3,585.85 
C)  $3,601.89 
D)  $3,676.14

Question 19

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B)  increases the likely fluctuation in a portfolio's return, but reduces firm­specific risk.. 
C)  reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D)  reduces the likely fluctuation in a portfolio's return and reduces firm­specific risk. 
A)  increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B)  increases the likely fluctuation in a portfolio's return, but reduces firm­specific risk.. 
C)  reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D)  reduces the likely fluctuation in a portfolio's return and reduces firm­specific risk.

Question 20

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

A)  risk increases at an increasing rate. 
B)  risk increases at a decreasing rate. 
C)  risk decreases at an increasing rate. 
D)  risk decreases at a decreasing rate. 
A)  risk increases at an increasing rate. 
B)  risk increases at a decreasing rate. 
C)  risk decreases at an increasing rate. 
D)  risk decreases at a decreasing rate.

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

At which interest rate is the present value of $360 three years from today equal to about $310 today?

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

David's Utility Function If David's current wealth is $61,000, then

Which of the following makes) insurance premiums higher than otherwise?

Why might someone be willing to pay more than the fundamental value for a stock?

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Is Dave risk averse? Explain.

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.

Which of the following games might a risk-averse person play?

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Diversification

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

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 Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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Exam 9: The Basic Tools of Finance

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

At which interest rate is the present value of $360 three years from today equal to about $310 today?

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

David's Utility Function If David's current wealth is $61,000, then

Which of the following makes) insurance premiums higher than otherwise?

Why might someone be willing to pay more than the fundamental value for a stock?

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Is Dave risk averse? Explain.

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.

Which of the following games might a risk-averse person play?

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Diversification

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

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 Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters