Exam 9: The Basic Tools of Finance

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

Black Oil Company considered building a service station in a new location. The owners and their accountants decided that this was the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the station changed. In which case do these changes both make it less likely that they will now build the station?

Diversification reduces

If the interest rate is 4%, in which of the following cases is the future value the largest?

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

Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work.

Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

What is the future value of $500 one year from today if the interest rate is 6 percent?

A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?

What is the future value of $375 at an interest rate of 3 percent one year from today?

How does moral hazard matter in the market for insurance?

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

One way to characterize the difference between compounding and discounting is to say that

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Which of the following statements best describes the economist's view of finance and the financial system?

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

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

A risk-averse person has