Question 1

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

Accepted Answer

A)  10 
B)  14 
C)  17 
D)  20 
A)  10 
B)  14 
C)  17 
D)  20

Question 2

What is meant by an asset bubble?

Accepted Answer

The price of an asse

Question 3

Some people claim that stocks follow a random walk. What does this mean?

Accepted Answer

A)  The price of stock one day is about what it was on the previous day. 
B)  Changes in stock prices cannot be predicted from available information. 
C)  Stock prices are not determined by market fundamentals such as supply and demand. 
D)  Prices of stocks of different firms in the same industry show no or little tendency to move together. 
A)  The price of stock one day is about what it was on the previous day. 
B)  Changes in stock prices cannot be predicted from available information. 
C)  Stock prices are not determined by market fundamentals such as supply and demand. 
D)  Prices of stocks of different firms in the same industry show no or little tendency to move together.

Question 4

You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,154 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,477.10 one year from today. In order for the same interest rate to apply to the two loans, X =

Accepted Answer

A)  $2,300.00. 
B)  $2,450.00. 
C)  $2,500.00. 
D)  $2,525.50. 
A)  $2,300.00. 
B)  $2,450.00. 
C)  $2,500.00. 
D)  $2,525.50.

Question 5

Some people argue that there are two advantages to holding mutual funds. The first is that mutual funds provide an inexpensive way to hold a diversified portfolio. The second is that because of their expertise mutual fund managers should be able to consistently beat the market. Which of the following does the evidence show?

Accepted Answer

A)  Diversification does reduce risk and mutual funds typically outperform the market. 
B)  Diversification does reduce risk, but mutual funds do not typically outperform the market. 
C)  Diversification does not reduce risk but mutual funds typically outperform the market. 
D)  Diversification does not reduce risk and mutual funds do not typically outperform the market. 
A)  Diversification does reduce risk and mutual funds typically outperform the market. 
B)  Diversification does reduce risk, but mutual funds do not typically outperform the market. 
C)  Diversification does not reduce risk but mutual funds typically outperform the market. 
D)  Diversification does not reduce risk and mutual funds do not typically outperform the market.

Question 6

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

Accepted Answer

A)  about $860 
B)  about $870 
C)  about $880 
D)  about $890 
A)  about $860 
B)  about $870 
C)  about $880 
D)  about $890

Question 7

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Accepted Answer

A) True 
 B)False

Question 8

In the 1990s, Fed Chairperson Alan Greenspan questioned whether the stock market

Accepted Answer

A)  boom at that time reflected "irrational exuberance." 
B)  decline at that time reflected "irrational funk." 
C)  boom at that time reflected "rational exuberance." 
D)  decline at that time reflected "rational funk." 
A)  boom at that time reflected "irrational exuberance." 
B)  decline at that time reflected "irrational funk." 
C)  boom at that time reflected "rational exuberance." 
D)  decline at that time reflected "rational funk."

Question 9

No particular stock is a better buy than any other stock if

Accepted Answer

A)  stock prices are driven by investors' "animal spirits." 
B)  the random-walk theory of stock prices is incorrect. 
C)  the efficient markets hypothesis is correct. 
D)  actively managed mutual funds always outperform index funds. 
A)  stock prices are driven by investors' "animal spirits." 
B)  the random-walk theory of stock prices is incorrect. 
C)  the efficient markets hypothesis is correct. 
D)  actively managed mutual funds always outperform index funds.

Question 10

You are expecting to receive $750 at some time in the future. Which of the following would unambiguously decrease the present value of this future payment?

Accepted Answer

A)  Interest rates rise and you get the payment sooner. 
B)  Interest rates rise and you have to wait longer for the payment. 
C)  Interest rates fall and you get the payment sooner. 
D)  Interest rates fall and you have to wait longer to get the payment. 
A)  Interest rates rise and you get the payment sooner. 
B)  Interest rates rise and you have to wait longer for the payment. 
C)  Interest rates fall and you get the payment sooner. 
D)  Interest rates fall and you have to wait longer to get the payment.

Question 11

If a person is risk averse, then as wealth increases, total utility of wealth

Accepted Answer

A)  increases at an increasing rate. 
B)  increases at a decreasing rate. 
C)  decreases at an increasing rate. 
D)  decreases at a decreasing rate. 
A)  increases at an increasing rate. 
B)  increases at a decreasing rate. 
C)  decreases at an increasing rate. 
D)  decreases at a decreasing rate.

Question 12

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Accepted Answer

A)  $4,531.52 
B)  $4,878.52 
C)  $5,124.50 
D)  $5,516.91 
A)  $4,531.52 
B)  $4,878.52 
C)  $5,124.50 
D)  $5,516.91

Question 13

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Accepted Answer

A)  4 years 
B)  5 years 
C)  6 years 
D)  7 years 
A)  4 years 
B)  5 years 
C)  6 years 
D)  7 years

Question 14

Suppose you win a small lottery and you are given the following choice: You can receive 1) an immediate payment of $5,000 or 2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is

Accepted Answer

A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent. 
A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent.

Question 15

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Accepted Answer

A) True 
 B)False

Question 16

In effect, an annuity provides insurance

Accepted Answer

A)  against the risk of dying and leaving one's family without a regular income. 
B)  against the risk of living too long. 
C)  to people who are not risk-averse. 
D)  to people whose utility functions do not display the usual properties. 
A)  against the risk of dying and leaving one's family without a regular income. 
B)  against the risk of living too long. 
C)  to people who are not risk-averse. 
D)  to people whose utility functions do not display the usual properties.

Question 17

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel argued that, in the years leading up to the financial crisis of 2008-2009,

Accepted Answer

A)  financial firms acted in too risky a fashion. 
B)  the Federal Reserve's efforts to rein in the risky behavior of certain financial firms were inadequate. 
C)  falling house prices "crashed the banks and the economy." 
D)  All of the above are correct. 
A)  financial firms acted in too risky a fashion. 
B)  the Federal Reserve's efforts to rein in the risky behavior of certain financial firms were inadequate. 
C)  falling house prices "crashed the banks and the economy." 
D)  All of the above are correct.

Question 18

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 7% interest rate, the present val

Question 19

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B)  increases the likely fluctuation in a portfolio's return, but reduces firm­specific risk.. 
C)  reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D)  reduces the likely fluctuation in a portfolio's return and reduces firm­specific risk. 
A)  increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B)  increases the likely fluctuation in a portfolio's return, but reduces firm­specific risk.. 
C)  reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D)  reduces the likely fluctuation in a portfolio's return and reduces firm­specific risk.

Question 20

What is the future value of $800 one year from today if the interest rate is 7 percent?

Accepted Answer

A)  $747.66 
B)  $756.00 
C)  $856.00 
D)  None of the above are correct to the nearest cent. 
A)  $747.66 
B)  $756.00 
C)  $856.00 
D)  None of the above are correct to the nearest cent.

Exam 19: The Basic Tools of Finance

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

What is meant by an asset bubble?

Some people claim that stocks follow a random walk. What does this mean?

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

In the 1990s, Fed Chairperson Alan Greenspan questioned whether the stock market

No particular stock is a better buy than any other stock if

You are expecting to receive $750 at some time in the future. Which of the following would unambiguously decrease the present value of this future payment?

If a person is risk averse, then as wealth increases, total utility of wealth

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

In effect, an annuity provides insurance

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel argued that, in the years leading up to the financial crisis of 2008-2009,

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Diversification

What is the future value of $800 one year from today if the interest rate is 7 percent?

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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