Exam 19: The Basic Tools of Finance

Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent.

What is the future value of $450 at an interest rate of 9 percent two years from today?

A firm has four 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 $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C 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 D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

If Alan is risk-averse, then he will always

How does adverse selection affect the insurance market?

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?

Dividends

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

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?

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

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

By holding insurance a person

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

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Write the formula to find the present value of $x to be paid in n years.

Describe the shape of the utility function of a risk averse person.

Which of the following is the largest?

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,125 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,200 two years from today. In order for the same interest rate to apply to the two loans, X =