Question 1

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)    A

Question 2

Diminishing marginal utility of wealth implies that the utility function

Accepted Answer

A)  has increasing slope and a person is risk averse. 
B)  has increasing slope and a person is not risk averse. 
C)  has decreasing slope and a person is risk averse 
D)  has decreasing slope and a person is not risk averse. 
A)  has increasing slope and a person is risk averse. 
B)  has increasing slope and a person is not risk averse. 
C)  has decreasing slope and a person is risk averse 
D)  has decreasing slope and a person is not risk averse. C

Question 3

Write the formula for finding the future value in n years of $x today.

Accepted Answer

$x1+ r)n

Question 4

Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action

Accepted Answer

A)  increases both risk and the average rate of return. 
B)  decreases both risk and the average rate of return. 
C)  increases risk, but decreases the average rate of return. 
D)  decreases risk, but increases the average rate of return. 
A)  increases both risk and the average rate of return. 
B)  decreases both risk and the average rate of return. 
C)  increases risk, but decreases the average rate of return. 
D)  decreases risk, but increases the average rate of return.

Question 5

The value of a stock is based on the

Accepted Answer

A)  present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B)  present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C)  future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D)  future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
A)  present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B)  present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C)  future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D)  future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.

Question 6

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A)  Interest rates rise and truck prices rise. 
B)  Interest rates fall and truck prices rise. 
C)  Interest rates rise and truck prices fall. 
D)  Interest rates fall and truck prices fall. 
A)  Interest rates rise and truck prices rise. 
B)  Interest rates fall and truck prices rise. 
C)  Interest rates rise and truck prices fall. 
D)  Interest rates fall and truck prices fall.

Question 7

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)  Britney is risk averse. 
B)  Britney gains more satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of increasing marginal utility applies to Britney. 
D)  All of the above are correct. 
A)  Britney is risk averse. 
B)  Britney gains more satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of increasing marginal utility applies to Britney. 
D)  All of the above are correct.

Question 8

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Accepted Answer

A)  deadweight loss 
B)  present value 
C)  economic growth 
D)  financial intermediation 
A)  deadweight loss 
B)  present value 
C)  economic growth 
D)  financial intermediation

Question 9

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Accepted Answer

A)  9% but not 10% 
B)  10% but not 11% 
C)  11% but not 12% 
D)  None of the above is correct; a risk averse person would not accept any of the above bets. 
A)  9% but not 10% 
B)  10% but not 11% 
C)  11% but not 12% 
D)  None of the above is correct; a risk averse person would not accept any of the above bets.

Question 10

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct, then what is the current interest rate?

Accepted Answer

A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  9 percent 
A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  9 percent

Question 11

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Accepted Answer

A)  $110.00 two years from today. 
B)  $112.49 three years from today. 
C)  $116.00 four years from today. 
D)  $123.67 five years from today. 
A)  $110.00 two years from today. 
B)  $112.49 three years from today. 
C)  $116.00 four years from today. 
D)  $123.67 five years from today.

Question 12

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Accepted Answer

The answer of Write the formula for finding the future...

Question 13

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

Accepted Answer

Mark had more in his account.

Question 14

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 15

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

A) True 
 B)False

Question 16

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Accepted Answer

A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk, but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk. 
A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk, but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk.

Question 17

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

Accepted Answer

A)  You will receive $1,000 in 5 years and the annual interest rate is 5 percent. 
B)  You will receive $1,000 in 10 years and the annual interest rate is 3 percent. 
C)  You will receive $2,000 in 10 years and the annual interest rate is 10 percent. 
D)  You will receive $2,400 in 15 years and the annual interest rate is 8 percent. 
A)  You will receive $1,000 in 5 years and the annual interest rate is 5 percent. 
B)  You will receive $1,000 in 10 years and the annual interest rate is 3 percent. 
C)  You will receive $2,000 in 10 years and the annual interest rate is 10 percent. 
D)  You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

Question 18

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Accepted Answer

A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.5 years 
A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.5 years

Question 19

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Accepted Answer

A)  5 percent 
B)  4 percent 
C)  3 percent 
D)  2 percent 
A)  5 percent 
B)  4 percent 
C)  3 percent 
D)  2 percent

Question 20

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.

Accepted Answer

Jack's should remodel. The pre

Exam 19: The Basic Tools of Finance

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?

Diminishing marginal utility of wealth implies that the utility function

Write the formula for finding the future value in n years of $x today.

Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action

The value of a stock is based on the

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct, then what is the current interest rate?

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

If stock prices follow a random walk, it means

Risk aversion simply means that people dislike bad things to happen.

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

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

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

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 Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

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