Question 1

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Accepted Answer

A)  $240 paid in three years 
B)  $225 paid in two years 
C)  $210 paid in one year 
D)  $200 today 
A)  $240 paid in three years 
B)  $225 paid in two years 
C)  $210 paid in one year 
D)  $200 today

Question 2

Risk

Accepted Answer

A)  can be reduced by placing a large number of small bets rather than a small number of large bets. 
B)  can be reduced by increasing the number of stocks in a portfolio. 
C)  Both A and B are correct. 
D)  Neither A nor B are correct. 
A)  can be reduced by placing a large number of small bets rather than a small number of large bets. 
B)  can be reduced by increasing the number of stocks in a portfolio. 
C)  Both A and B are correct. 
D)  Neither A nor B are correct.

Question 3

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu

Question 4

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

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 5

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

Accepted Answer

A)  You receive $90.91 two years from today. 
B)  You receive $82.64 one year from today. 
C)  You receive $75.13 today. 
D)  All of these payments have the same present value to the nearest cent. 
A)  You receive $90.91 two years from today. 
B)  You receive $82.64 one year from today. 
C)  You receive $75.13 today. 
D)  All of these payments have the same present value to the nearest cent.

Question 6

For a risk averse person,

Accepted Answer

A)  the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B)  the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C)  the utility function exhibits the property of increasing marginal utility. 
D)  the utility function gets steeper as wealth increases. 
A)  the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B)  the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C)  the utility function exhibits the property of increasing marginal utility. 
D)  the utility function gets steeper as wealth increases.

Question 7

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Accepted Answer

A)  market risk. 
B)  moral hazard. 
C)  adverse selection. 
D)  risk aversion. 
A)  market risk. 
B)  moral hazard. 
C)  adverse selection. 
D)  risk aversion.

Question 8

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Accepted Answer

A)  4.5 percent 
B)  5.4 percent 
C)  6.2 percent 
D)  8.0 percent 
A)  4.5 percent 
B)  5.4 percent 
C)  6.2 percent 
D)  8.0 percent

Question 9

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Accepted Answer

A) True 
 B)False

Question 10

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A)  80 to 100. 
B)  40 to 80. 
C)  10 to 20. 
D)  1 to 10. 
A)  80 to 100. 
B)  40 to 80. 
C)  10 to 20. 
D)  1 to 10.

Question 11

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

Accepted Answer

The efficient markets hypothes

Question 12

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

Accepted Answer

A)  the two-year account at 9 percent 
B)  the three-year account at 6 percent 
C)  the six-year account at 3 percent 
D)  The accounts are all worth the same. 
A)  the two-year account at 9 percent 
B)  the three-year account at 6 percent 
C)  the six-year account at 3 percent 
D)  The accounts are all worth the same.

Question 13

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Accepted Answer

A)  6 
B)  8 
C)  10 
D)  12 
A)  6 
B)  8 
C)  10 
D)  12

Question 14

Albert Einstein once referred to compounding as

Accepted Answer

A)  "an obsession among economists that defies explanation." 
B)  "the greatest mathematical discovery of all time." 
C)  his own discovery. 
D)  John Maynard Keynes's greatest contribution. 
A)  "an obsession among economists that defies explanation." 
B)  "the greatest mathematical discovery of all time." 
C)  his own discovery. 
D)  John Maynard Keynes's greatest contribution.

Question 15

The possibility of speculative bubbles in the stock market arises in part because

Accepted Answer

A)  stock prices may not depend at all on psychological factors. 
B)  fundamental analysis may be the correct way to evaluate the value of stocks. 
C)  future streams of dividend payments are very hard to estimate. 
D)  the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold. 
A)  stock prices may not depend at all on psychological factors. 
B)  fundamental analysis may be the correct way to evaluate the value of stocks. 
C)  future streams of dividend payments are very hard to estimate. 
D)  the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.

Question 16

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Accepted Answer

A)  $3,680.00 
B)  $3,712.77 
C)  $3,750.00 
D)  $3,772.57 
A)  $3,680.00 
B)  $3,712.77 
C)  $3,750.00 
D)  $3,772.57

Question 17

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Accepted Answer

A)  $12,579.84 
B)  $12,596.80 
C)  $12,597.12 
D)  None of the above are correct to the nearest cent. 
A)  $12,579.84 
B)  $12,596.80 
C)  $12,597.12 
D)  None of the above are correct to the nearest cent.

Question 18

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

Accepted Answer

A)  $1,200.00 
B)  $1,111.77 
C)  $983.58 
D)  $859.09 
A)  $1,200.00 
B)  $1,111.77 
C)  $983.58 
D)  $859.09

Question 19

By diversifying, the risk of holding stock

Accepted Answer

A)  can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B)  can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C)  can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D)  can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
A)  can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B)  can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C)  can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D)  can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

Question 20

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. Suppose the vertical distance between the points 0, A) and 0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Accepted Answer

A)  Dexter's subjective measure of his well­being would increase by less than 12 units. 
B)  Dexter's subjective measure of his well­being would increase by more than 12 units. 
C)  Dexter would change from being a risk-averse person into a person who is not risk averse. 
D)  Dexter would forgo the insurance he bought when his wealth was $1,300. 
A)  Dexter's subjective measure of his well­being would increase by less than 12 units. 
B)  Dexter's subjective measure of his well­being would increase by more than 12 units. 
C)  Dexter would change from being a risk-averse person into a person who is not risk averse. 
D)  Dexter would forgo the insurance he bought when his wealth was $1,300.

Exam 19: The Basic Tools of Finance

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Risk

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

For a risk averse person,

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

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

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Albert Einstein once referred to compounding as

The possibility of speculative bubbles in the stock market arises in part because

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

By diversifying, the risk of holding stock

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points 0, A) and 0, B) is 12. If his wealth increased from $1,300 to $1,800, then

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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