Question 1

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

Accepted Answer

A)  A payment of $100 to be received one year from today, with a 2 percent interest rate, has a present value of $98.81. 
B)  A payment of $200 to be received two years from today, with a 3 percent interest rate, has a present value of $188.52. 
C)  A payment of $300 to be received three years from today, with a 4 percent interest rate, has a present value of $234.34. 
D)  None of the above are correct to the nearest cent. 
A)  A payment of $100 to be received one year from today, with a 2 percent interest rate, has a present value of $98.81. 
B)  A payment of $200 to be received two years from today, with a 3 percent interest rate, has a present value of $188.52. 
C)  A payment of $300 to be received three years from today, with a 4 percent interest rate, has a present value of $234.34. 
D)  None of the above are correct to the nearest cent.

Question 2

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

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 3

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Accepted Answer

A)  rise, and investment spending rise. 
B)  rise, and investment spending fall. 
C)  fall, and investment spending rise. 
D)  fall, and investment spending fall. 
A)  rise, and investment spending rise. 
B)  rise, and investment spending fall. 
C)  fall, and investment spending rise. 
D)  fall, and investment spending fall.

Question 4

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Accepted Answer

A)  right, so the price rises. 
B)  right, so the price falls. 
C)  left, so the price rises. 
D)  left, so the price falls. 
A)  right, so the price rises. 
B)  right, so the price falls. 
C)  left, so the price rises. 
D)  left, so the price falls.

Question 5

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 6

The efficient markets hypothesis implies that

Accepted Answer

A)  building a portfolio based on a published list of the "most respected" companies is likely to produce a better­ than-average return. 
B)  if a stock rose in price last year, it is likely to rise in price this year. 
C)  managed mutual funds should generally outperform indexed mutual funds. 
D)  None of the above are correct. 
A)  building a portfolio based on a published list of the "most respected" companies is likely to produce a better­ than-average return. 
B)  if a stock rose in price last year, it is likely to rise in price this year. 
C)  managed mutual funds should generally outperform indexed mutual funds. 
D)  None of the above are correct.

Question 7

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Accepted Answer

A)  the present value of the factory rises. It's more likely the company will build the factory. 
B)  the present value of the factory rises. It's less likely the company will build the factory. 
C)  the present value of the factory falls. It's more likely the company will build the factory. 
D)  the present value of the factory falls. It's less likely the company will build the factory. 
A)  the present value of the factory rises. It's more likely the company will build the factory. 
B)  the present value of the factory rises. It's less likely the company will build the factory. 
C)  the present value of the factory falls. It's more likely the company will build the factory. 
D)  the present value of the factory falls. It's less likely the company will build the factory.

Question 8

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Accepted Answer

A)  the present value of the returns from the mill will fall, so Allen will be less likely to build the mill. 
B)  the present value of the returns from the mill will fall, so Allen will be more likely to build the mill. 
C)  the present value of the returns from the mill will rise, so Allen will be less likely to build the mill. 
D)  the present value of the returns from the mill will rise, so Allen will be more likely to build the mill. 
A)  the present value of the returns from the mill will fall, so Allen will be less likely to build the mill. 
B)  the present value of the returns from the mill will fall, so Allen will be more likely to build the mill. 
C)  the present value of the returns from the mill will rise, so Allen will be less likely to build the mill. 
D)  the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.

Question 9

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls. 
A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls.

Question 10

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here. 
A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here.

Question 12

At which interest rate is the present value of $95.40 one year from today equal to $90 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 13

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu

Question 14

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Accepted Answer

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

Question 15

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 16

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A)  Dexter is risk averse. 
B)  Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C)  the property of diminishing marginal utility does not apply to Dexter. 
D)  All of the above are correct. 
A)  Dexter is risk averse. 
B)  Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C)  the property of diminishing marginal utility does not apply to Dexter. 
D)  All of the above are correct.

Question 17

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Accepted Answer

A) True 
 B)False

Question 18

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

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 19

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Accepted Answer

A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent 
A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent

Question 20

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Accepted Answer

A)  $457.14 
B)  $468.02 
C)  $478.47 
D)  None of the above are correct to the nearest cent. 
A)  $457.14 
B)  $468.02 
C)  $478.47 
D)  None of the above are correct to the nearest cent.

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

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

The efficient markets hypothesis implies that

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

The market for insurance is an example of diversification.

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

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

Exam 9: The Basic Tools of Finance

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

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

The efficient markets hypothesis implies that

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

The market for insurance is an example of diversification.

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

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