Exam 14: The Basic Tools of Finance

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

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

What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?

Which of the following best illustrates moral hazard?

Which of the following is not correct?

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Which of the following is not correct?

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.

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct? A) The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. B) The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. C) The interest rates on the two loans are the same. D) There is not enough information to determine which loan has the higher interest rate.

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

The price of a bond is equal to the sum of the present values of its future payments. Suppose a certain bond pays $50 one year from today and $1,050 two years from today. What is the price of the bond if the interest rate is 5 percent?

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

A risk-averse person has

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

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

The field of finance primarily studies

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?

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.