Exam 19: The Basic Tools of Finance

Suppose you win a small lottery and you are given the following choice: You can receive 1) an immediate payment of $10,000 or 2) two annual payments, each in the amount of $5,200, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the immediate payment of $10,000 if the interest rate is

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

The efficient markets hypothesis says that

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Which of the following methods of picking stocks is not consistent with fundamental analysis?

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

List three different ways that a risk-averse person can reduce financial risk.

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

The future value of a deposit in a savings account will be larger

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain why

Risk-averse persons will take no risks.

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

According to the efficient market hypothesis, which of the following statements is not correct?

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

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. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability 1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?