Question 1

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. In what ways) does the graph differ from the usual case?

Accepted Answer

A)  The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping. 
B)  The utility function shown here is bowed downward convex), whereas in the usual case the utility function is bowed upward concave). 
C)  On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D)  On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis. 
A)  The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping. 
B)  The utility function shown here is bowed downward convex), whereas in the usual case the utility function is bowed upward concave). 
C)  On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D)  On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.

Question 2

The field of finance primarily studies

Accepted Answer

A)  how society manages its scarce resources. 
B)  the implications of time and risk for allocating resources over time. 
C)  firms' decisions concerning how much to produce and what price to charge. 
D)  how society can reduce market risk. 
A)  how society manages its scarce resources. 
B)  the implications of time and risk for allocating resources over time. 
C)  firms' decisions concerning how much to produce and what price to charge. 
D)  how society can reduce market risk.

Question 3

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

Accepted Answer

A)  You receive the payment 4 years from now and the interest rate is 4 percent. 
B)  You receive the payment 4 years from now and the interest rate is 5 percent. 
C)  You receive the payment 5 years from now and the interest rate is 4 percent. 
D)  You receive the payment 5 years from now and the interest rate is 5 percent. 
A)  You receive the payment 4 years from now and the interest rate is 4 percent. 
B)  You receive the payment 4 years from now and the interest rate is 5 percent. 
C)  You receive the payment 5 years from now and the interest rate is 4 percent. 
D)  You receive the payment 5 years from now and the interest rate is 5 percent.

Question 4

Which of the following changes would decrease the present value of a future payment?

Accepted Answer

A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  an increase in the interest rate 
D)  All of the above are correct. 
A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  an increase in the interest rate 
D)  All of the above are correct.

Question 5

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 6

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A)  upward-sloping and has decreasing slope. 
B)  upward-sloping and has increasing slope. 
C)  downward-sloping and has decreasing slope. 
D)  downward-sloping and has increasing slope. 
A)  upward-sloping and has decreasing slope. 
B)  upward-sloping and has increasing slope. 
C)  downward-sloping and has decreasing slope. 
D)  downward-sloping and has increasing slope.

Question 7

Discuss the statistical evidence concerning the efficient markets hypothesis.

Accepted Answer

The evidence indicates that stock prices

Question 8

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

Accepted Answer

A)  $51,830.26 
B)  $54,464.96 
C)  $57,188.21 
D)  $58,237.71 
A)  $51,830.26 
B)  $54,464.96 
C)  $57,188.21 
D)  $58,237.71

Question 9

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

Accepted Answer

A)  $302.50 
B)  $306.23 
C)  $308.67 
D)  $309.39 
A)  $302.50 
B)  $306.23 
C)  $308.67 
D)  $309.39

Question 10

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A)  the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B)  the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C)  the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D)  the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions. 
A)  the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B)  the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C)  the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D)  the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.

Question 11

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Accepted Answer

A)  $X1 + rN)N 
B)  $X1 + r)N 
C)  $X1 + rN) 
D)  $X1 + r/N)N 
A)  $X1 + rN)N 
B)  $X1 + r)N 
C)  $X1 + rN) 
D)  $X1 + r/N)N

Question 12

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall. 
A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall.

Question 13

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following games might a risk-averse person play?

Accepted Answer

A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct. 
A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct.

Question 15

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Accepted Answer

A) True 
 B)False

Question 16

Can insurance be thought of as diversification? Defend your answer.

Accepted Answer

Yes. It replaces a l

Question 17

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
A)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.

Question 18

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 19

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Accepted Answer

A)  a mutual fund. 
B)  an insurance company. 
C)  a diversified company. 
D)  an equity-financed company. 
A)  a mutual fund. 
B)  an insurance company. 
C)  a diversified company. 
D)  an equity-financed company.

Question 20

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

A) True 
 B)False

Exam 19: The Basic Tools of Finance

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. In what ways) does the graph differ from the usual case?

The field of finance primarily studies

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

Which of the following changes would decrease the present value of a future payment?

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?

Diminishing marginal utility of wealth implies that the utility function is

Discuss the statistical evidence concerning the efficient markets hypothesis.

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

A bank might make mortgages to people in different regions of the country. By doing so

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Which of the following games might a risk-averse person play?

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Can insurance be thought of as diversification? Defend your answer.

Diversification

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

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

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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