Question 1

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

Accepted Answer

A)  5 
B)  7 
C)  9 
D)  11 
A)  5 
B)  7 
C)  9 
D)  11

Question 2

A firm has three different investment options, each costing $10 million. Option A will generate $12 million in revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option C will generate $18 million in revenue at the end of three years. Which option should the firm choose?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here. 
A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here.

Question 3

Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?

Accepted Answer

A)  Amy 
B)  Bill 
C)  Celia 
D)  They each get the same amount. 
A)  Amy 
B)  Bill 
C)  Celia 
D)  They each get the same amount.

Question 4

If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

Approximat

Question 5

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls. 
A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls.

Question 6

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. For the person to whom this utility function applies,

Accepted Answer

A)  the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. 
A)  the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

Question 7

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

Accepted Answer

A) True 
 B)False

Question 8

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A)  $5001.05)2 + $500/1.05)2 
B)  $5001.05)2 + $500 
C)  $500 + $500/1.05)2 
D)  $500 + $500 
A)  $5001.05)2 + $500/1.05)2 
B)  $5001.05)2 + $500 
C)  $500 + $500/1.05)2 
D)  $500 + $500

Question 9

Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate at which Markovich still would be willing to build the plant?

Accepted Answer

A)  3 percent 
B)  3.5 percent 
C)  4 percent 
D)  4.5 percent 
A)  3 percent 
B)  3.5 percent 
C)  4 percent 
D)  4.5 percent

Question 10

Ronaldo's Foods considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?

Accepted Answer

A)  Interest rates rise and the cost of building the store rises. 
B)  Interest rates rise and the cost of building the store falls. 
C)  Interest rates fall and the cost of building the store rises. 
D)  Interest rates fall and the cost of building the store falls. 
A)  Interest rates rise and the cost of building the store rises. 
B)  Interest rates rise and the cost of building the store falls. 
C)  Interest rates fall and the cost of building the store rises. 
D)  Interest rates fall and the cost of building the store falls.

Question 11

If the efficient market hypothesis is correct, then

Accepted Answer

A)  index funds should typically beat managed funds, and usually do. 
B)  index fund should typically beat managed funds, but usually do not. 
C)  mutual funds should typically beat index funds, and usually do. 
D)  mutual funds should typically beat index funds, but usually do not. 
A)  index funds should typically beat managed funds, and usually do. 
B)  index fund should typically beat managed funds, but usually do not. 
C)  mutual funds should typically beat index funds, and usually do. 
D)  mutual funds should typically beat index funds, but usually do not.

Question 12

Which of the following makes) insurance premiums higher than otherwise?

Accepted Answer

A)  adverse selection and moral hazard 
B)  adverse selection, but not moral hazard 
C)  moral hazard, but not adverse selection 
D)  neither adverse selection nor moral hazard 
A)  adverse selection and moral hazard 
B)  adverse selection, but not moral hazard 
C)  moral hazard, but not adverse selection 
D)  neither adverse selection nor moral hazard

Question 13

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Accepted Answer

A)  raise the price of the corporation's stock; if it does not the stock is overvalued. 
B)  raise the price of the corporation's stock; if it does not the stock is undervalued. 
C)  reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D)  reduce the price of the corporation's stock; if it does not the stock is undervalued. 
A)  raise the price of the corporation's stock; if it does not the stock is overvalued. 
B)  raise the price of the corporation's stock; if it does not the stock is undervalued. 
C)  reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D)  reduce the price of the corporation's stock; if it does not the stock is undervalued.

Question 14

James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if

Accepted Answer

A)  X < 1,045.00. 
B)  X < 1,188.89. 
C)  X < 1,266.67. 
D)  X < 1,360.86. 
A)  X < 1,045.00. 
B)  X < 1,188.89. 
C)  X < 1,266.67. 
D)  X < 1,360.86.

Question 15

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

Accepted Answer

A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio. 
A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.

Question 16

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

Accepted Answer

A)  Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
B)  Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
C)  Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001. 
D)  None of the above answers can be inferred from the appearance of the utility function. 
A)  Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
B)  Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. 
C)  Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001. 
D)  None of the above answers can be inferred from the appearance of the utility function.

Question 17

Scenario 27-2
Suppose Dave has a utility function   where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for   .

Accepted Answer

Here is th

Question 18

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Accepted Answer

A)  $210 
B)  $300 
C)  $800 
D)  $1,010 
A)  $210 
B)  $300 
C)  $800 
D)  $1,010

Question 19

Which of the following is adverse selection?

Accepted Answer

A)  the risk associated with selecting stocks in only a few specific companies 
B)  the risk that a person will become overconfident in his ability to select stocks 
C)  a high-risk person being more likely to apply for insurance 
D)  after obtaining insurance a person having less incentive to be careful 
A)  the risk associated with selecting stocks in only a few specific companies 
B)  the risk that a person will become overconfident in his ability to select stocks 
C)  a high-risk person being more likely to apply for insurance 
D)  after obtaining insurance a person having less incentive to be careful

Question 20

Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

Accepted Answer

With a 7% interest rate the rule of 70 i

Exam 19: The Basic Tools of Finance

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies,

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate at which Markovich still would be willing to build the plant?

If the efficient market hypothesis is correct, then

Which of the following makes) insurance premiums higher than otherwise?

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

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

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for .

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Which of the following is adverse selection?

Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

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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