Question 1

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

Accepted Answer

A)  $1,150.00 
B)  $1,157.63 
C)  $1,215.51 
D)  $1,250.00 
A)  $1,150.00 
B)  $1,157.63 
C)  $1,215.51 
D)  $1,250.00

Question 2

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Accepted Answer

A)  Broker A: "There are risks in holding stocks, even in a highly diversified portfolio." 
B)  Broker B: "Portfolios with smaller standard deviations have lower risk." 
C)  Broker C: "Stocks with greater risks offer lower average returns." 
D)  They all gave her correct advice. 
A)  Broker A: "There are risks in holding stocks, even in a highly diversified portfolio." 
B)  Broker B: "Portfolios with smaller standard deviations have lower risk." 
C)  Broker C: "Stocks with greater risks offer lower average returns." 
D)  They all gave her correct advice.

Question 3

The present value of a payment to be made in the future falls as

Accepted Answer

A)  the interest rate rises and the time until the payment is made increases. 
B)  the interest rate rises and the time until the payment is made decreases. 
C)  the interest rate falls and the time until the payment is made increases. 
D)  the interest rate falls and the time until the payment is made decreases. 
A)  the interest rate rises and the time until the payment is made increases. 
B)  the interest rate rises and the time until the payment is made decreases. 
C)  the interest rate falls and the time until the payment is made increases. 
D)  the interest rate falls and the time until the payment is made decreases.

Question 4

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Accepted Answer

A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent 
A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent

Question 5

Figure 27-4. The figure shows a utility function for Alex.  
-Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Accepted Answer

A)  the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth. 
B)  the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth. 
C)  the property of increasing utility does not apply to Alex. 
D)  the property of diminishing marginal utility does not apply to Alex. 
A)  the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth. 
B)  the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth. 
C)  the property of increasing utility does not apply to Alex. 
D)  the property of diminishing marginal utility does not apply to Alex.

Question 6

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Accepted Answer

A)  both the firm-specific risk and the market risk of his portfolio. 
B)  the firm-specific risk, but not the market risk of his portfolio. 
C)  the market risk, but not the firm-specific risk of his portfolio. 
D)  neither the market risk nor the firm-specific risk of his portfolio. 
A)  both the firm-specific risk and the market risk of his portfolio. 
B)  the firm-specific risk, but not the market risk of his portfolio. 
C)  the market risk, but not the firm-specific risk of his portfolio. 
D)  neither the market risk nor the firm-specific risk of his portfolio.

Question 7

Which of the following is correct concerning diversification?

Accepted Answer

A)  It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B)  It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C)  It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D)  None of the above is correct. 
A)  It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B)  It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C)  It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D)  None of the above is correct.

Question 8

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Accepted Answer

A)  $972.00 
B)  $973.44 
C)  $974.19 
D)  None of the above is correct. 
A)  $972.00 
B)  $973.44 
C)  $974.19 
D)  None of the above is correct.

Question 9

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 9%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 9% interest rate, the present val

Question 10

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A)  $907.03 to be paid in two years 
B)  $1,000.01 to be paid in two years 
C)  $1,100.01 to be paid in two years 
D)  $1,102.51 to be paid in two years 
A)  $907.03 to be paid in two years 
B)  $1,000.01 to be paid in two years 
C)  $1,100.01 to be paid in two years 
D)  $1,102.51 to be paid in two years

Question 11

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Market risk refers to economy wide risk

Question 12

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A)  Dexter is risk averse. 
B)  Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C)  the property of decreasing marginal utility applies to Dexter. 
D)  All of the above are correct. 
A)  Dexter is risk averse. 
B)  Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C)  the property of decreasing marginal utility applies to Dexter. 
D)  All of the above are correct.

Question 13

Greg's Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first year, $4 million the second year and have no value thereafter. Greg's Tasty Ice Cream should build the factory if the interest rate is

Accepted Answer

A)  3% but not if it is 4%. 
B)  4% but not if it is 5%. 
C)  5% but not if it is 6%. 
D)  6% but not if it is 7%. 
A)  3% but not if it is 4%. 
B)  4% but not if it is 5%. 
C)  5% but not if it is 6%. 
D)  6% but not if it is 7%.

Question 14

According to fundamental analysis, a saver should prefer to buy stocks that are

Accepted Answer

A)  undervalued. This means the price of the stock is low given the value of the corporation. 
B)  undervalued. This means the value of the corporation is low given the price of stock. 
C)  overvalued. This means the price of the stock is high given the value of the corporation. 
D)  overvalued. This means the value of the corporation is high given the price of stock. 
A)  undervalued. This means the price of the stock is low given the value of the corporation. 
B)  undervalued. This means the value of the corporation is low given the price of stock. 
C)  overvalued. This means the price of the stock is high given the value of the corporation. 
D)  overvalued. This means the value of the corporation is high given the price of stock.

Question 15

There are many concerns for risk-averse lenders. Consider the following: 1. Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans. 2. Lenders are concerned that real GDP will decline leading to reduced corporate profits. 3. Lenders are concerned that products produced by certain corporations will become obsolete.

Accepted Answer

A)  1 is market risk; 2 is firm-specific risk 
B)  2 is market risk; 3 is firm-specific risk 
C)  3 is market risk; 1 is firm-specific risk 
D)  2 is firm-specific risk; 3 is market risk 
A)  1 is market risk; 2 is firm-specific risk 
B)  2 is market risk; 3 is firm-specific risk 
C)  3 is market risk; 1 is firm-specific risk 
D)  2 is firm-specific risk; 3 is market risk

Question 16

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Accepted Answer

A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent 
A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent

Question 17

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

Accepted Answer

A)  raised both firm-specific risk and market risk. 
B)  raised firm-specific risk, but not market risk. 
C)  raised market risk, but not firm-specific risk. 
D)  None of the above is correct. 
A)  raised both firm-specific risk and market risk. 
B)  raised firm-specific risk, but not market risk. 
C)  raised market risk, but not firm-specific risk. 
D)  None of the above is correct.

Question 18

Fundamental analysis is

Accepted Answer

A)  the study of the relation between risk and return of stock portfolios. 
B)  the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C)  the study of a company's accounting statements and future prospects to determine its value. 
D)  a method used to determine how adding stocks to a portfolio will change the risk of the portfolio. 
A)  the study of the relation between risk and return of stock portfolios. 
B)  the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C)  the study of a company's accounting statements and future prospects to determine its value. 
D)  a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.

Question 19

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Accepted Answer

A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent 
A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent

Question 20

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Accepted Answer

A)  lower than about 5.5 percent. 
B)  higher than about 5.5 percent. 
C)  lower than about 7.5 percent. 
D)  higher than about 7.5 percent. 
A)  lower than about 5.5 percent. 
B)  higher than about 5.5 percent. 
C)  lower than about 7.5 percent. 
D)  higher than about 7.5 percent.

Exam 19: The Basic Tools of Finance

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

The present value of a payment to be made in the future falls as

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Which of the following is correct concerning diversification?

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

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 9%, should the firm undertake the project? Show evidence to support your answer.

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

According to fundamental analysis, a saver should prefer to buy stocks that are

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

Fundamental analysis is

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

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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