Exam 19: The Basic Tools of Finance

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. Is Lisa risk averse? Explain.

Suppose the interest rate is 5 percent. Consider three payment options: 1) $500 today. 2) $520 one year from today. 3) $550 two years from today. Which of the following is correct?

Laura says that the present value of $700 to be received one year from today if the interest rate is 6 percent is less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Cassie says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.

From the standpoint of the economy as a whole, the role of

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Marcia has four savings accounts. Which account has the largest balance?

The financial system

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

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

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

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

Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?