Question 1

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Accepted Answer

A) True 
 B)False

Question 2

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

Accepted Answer

A)  4.88 percent 
B)  6.00 percent 
C)  12.36 percent 
D)  None of the above is correct. 
A)  4.88 percent 
B)  6.00 percent 
C)  12.36 percent 
D)  None of the above is correct.

Question 3

The rule of 70 applies to a growing savings account but not to a growing economy.

Accepted Answer

A) True 
 B)False

Question 4

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

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 5

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Accepted Answer

A)  an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B)  an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C)  an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D)  an interest rate of 4.5 percent, with no processing fee and no bonus 
A)  an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B)  an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C)  an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D)  an interest rate of 4.5 percent, with no processing fee and no bonus

Question 6

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase 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 7

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Accepted Answer

A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall. 
A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall.

Question 8

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Accepted Answer

A)  $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years. 
B)  $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years. 
C)  $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years. 
D)  $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years. 
A)  $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years. 
B)  $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years. 
C)  $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years. 
D)  $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.

Question 9

Other things the same, as the number of stocks in a portfolio rises,

Accepted Answer

A)  risk increases and the standard deviation of the return rises. 
B)  risk increases and the standard deviation of the return falls. 
C)  risk decreases and the standard deviation of the return rises. 
D)  risk decreases and the standard deviation of the return falls. 
A)  risk increases and the standard deviation of the return rises. 
B)  risk increases and the standard deviation of the return falls. 
C)  risk decreases and the standard deviation of the return rises. 
D)  risk decreases and the standard deviation of the return falls.

Question 10

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Accepted Answer

A)  5.50 percent 
B)  5.65 percent 
C)  6.25 percent 
D)  7.05 percent 
A)  5.50 percent 
B)  5.65 percent 
C)  6.25 percent 
D)  7.05 percent

Question 11

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of FineLine Corporation Stock fall?

Accepted Answer

A)  both the interest rate rising and the revenue announcement 
B)  neither the interest rate rising nor the revenue announcement 
C)  only the interest rate rising 
D)  only the revenue announcement 
A)  both the interest rate rising and the revenue announcement 
B)  neither the interest rate rising nor the revenue announcement 
C)  only the interest rate rising 
D)  only the revenue announcement

Question 12

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)  A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B)  A person dislikes losing $400 more than he likes winning $400. 
C)  After obtaining automobile insurance a person drives less carefully than before. 
D)  A person intending to take up dangerous hobbies applies for life insurance. 
A)  A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B)  A person dislikes losing $400 more than he likes winning $400. 
C)  After obtaining automobile insurance a person drives less carefully than before. 
D)  A person intending to take up dangerous hobbies applies for life insurance.

Question 14

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A)  The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B)  The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C)  The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard. 
D)  The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection. 
A)  The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B)  The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C)  The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard. 
D)  The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection.

Question 15

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 16

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the highest present value today?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 17

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Accepted Answer

A)  surplus, so its price will rise. 
B)  surplus, so its price will fall. 
C)  shortage, so its price will rise. 
D)  shortage, so its price will fall. 
A)  surplus, so its price will rise. 
B)  surplus, so its price will fall. 
C)  shortage, so its price will rise. 
D)  shortage, so its price will fall.

Question 18

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

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

Question 19

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A)  the distance between the origin and point B 
B)  the distance between the origin and point C 
C)  the distance between point A and point C 
D)  the distance between point B and point C 
A)  the distance between the origin and point B 
B)  the distance between the origin and point C 
C)  the distance between point A and point C 
D)  the distance between point B and point C

Question 20

Which of the following changes would increase 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)  a decrease 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)  a decrease in the interest rate 
D)  All of the above are correct.

Exam 19: The Basic Tools of Finance

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

The rule of 70 applies to a growing savings account but not to a growing economy.

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Other things the same, as the number of stocks in a portfolio rises,

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Which of the following actions best illustrates adverse selection?

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the highest present value today?

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

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

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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