Question 1

A measure of the volatility of a variable is its

Accepted Answer

A)  present value. 
B)  future value. 
C)  return. 
D)  standard deviation. 
A)  present value. 
B)  future value. 
C)  return. 
D)  standard deviation.

Question 2

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

Accepted Answer

A)  10 
B)  14 
C)  17 
D)  20 
A)  10 
B)  14 
C)  17 
D)  20

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

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.

Accepted Answer

A)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
A)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Question 5

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see

Accepted Answer

A)  the demand for bank stocks rise which would raise the prices of bank stocks. 
B)  the demand for bank stocks rise which would reduce the prices of bank stocks. 
C)  the demand for bank stocks fall which would raise the prices of bank stocks. 
D)  the demand for bank stocks fall which would reduce the prices of bank stocks. 
A)  the demand for bank stocks rise which would raise the prices of bank stocks. 
B)  the demand for bank stocks rise which would reduce the prices of bank stocks. 
C)  the demand for bank stocks fall which would raise the prices of bank stocks. 
D)  the demand for bank stocks fall which would reduce the prices of bank stocks.

Question 6

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Accepted Answer

A)  $25,962 
B)  $27,297 
C)  $30,188 
D)  None of the above are correct to the nearest dollar. 
A)  $25,962 
B)  $27,297 
C)  $30,188 
D)  None of the above are correct to the nearest dollar.

Question 7

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

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 8

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

Accepted Answer

Mark had more in his account.

Question 9

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Accepted Answer

A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment. 
A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment.

Question 10

Black Oil Company considered building a service station in a new location. The owners and their accountants decided that this was the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the station changed. In which case do these changes both make it less likely that they will now build the station?

Accepted Answer

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

Question 11

Can insurance be thought of as diversification? Defend your answer.

Accepted Answer

Yes. It replaces a l

Question 12

What is the future value of $450 at an interest rate of 9 percent two years from today?

Accepted Answer

A)  $534.65 
B)  $546.35 
C)  $565.18 
D)  $574.13 
A)  $534.65 
B)  $546.35 
C)  $565.18 
D)  $574.13

Question 13

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

Accepted Answer

A)  $5001 + r) + $10,500/1 + r)2 
B)  $500/1 + r) + $10,500/1 + r)2 
C)  $11,000/1 + r)2 
D)  $5001 + r) + $10,5001 + r)2 
A)  $5001 + r) + $10,500/1 + r)2 
B)  $500/1 + r) + $10,500/1 + r)2 
C)  $11,000/1 + r)2 
D)  $5001 + r) + $10,5001 + r)2

Question 14

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Accepted Answer

Efficient market theory says that it sho

Question 15

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is correct concerning a risk-averse person?

Accepted Answer

A)  She would not play games where the probability of winning and losing a dollar are the same. 
B)  She might not buy health insurance if she thinks her risks are low. 
C)  Her marginal utility of wealth decreases as her income increases. 
D)  All of the above are correct. 
A)  She would not play games where the probability of winning and losing a dollar are the same. 
B)  She might not buy health insurance if she thinks her risks are low. 
C)  Her marginal utility of wealth decreases as her income increases. 
D)  All of the above are correct.

Question 17

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

A) True 
 B)False

Question 18

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Accepted Answer

A)  she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B)  the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C)  the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D)  the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth. 
A)  she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B)  the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C)  the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D)  the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.

Question 19

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Accepted Answer

A)  market risk by more than an increase from 110 to 120. 
B)  market risk by less than an increase from 110 to 120. 
C)  firm-specific risk by more than an increase from 110 to 120. 
D)  firm-specific risk by less than an increase from 110 to 120. 
A)  market risk by more than an increase from 110 to 120. 
B)  market risk by less than an increase from 110 to 120. 
C)  firm-specific risk by more than an increase from 110 to 120. 
D)  firm-specific risk by less than an increase from 110 to 120.

Question 20

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

Accepted Answer

A)  doing research such as thoroughly reading and analyzing companies' annual reports 
B)  choosing mutual funds that are managed by individuals with good reputations 
C)  viewing individual stock prices as unpredictable 
D)  relying upon the advice of Wall Street analysts 
A)  doing research such as thoroughly reading and analyzing companies' annual reports 
B)  choosing mutual funds that are managed by individuals with good reputations 
C)  viewing individual stock prices as unpredictable 
D)  relying upon the advice of Wall Street analysts

Exam 14: The Basic Tools of Finance

A measure of the volatility of a variable is its

If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Can insurance be thought of as diversification? Defend your answer.

What is the future value of $450 at an interest rate of 9 percent two years from today?

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Which of the following is correct concerning a risk-averse person?

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

An increase in the number of corporations in a portfolio from 1 to 10 reduces

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

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

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

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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