Question 1

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Accepted Answer

A)  $725.62. It would be higher if the interest rate were higher. 
B)  $727.28. It would be higher if the interest rate were higher. 
C)  $725.62. It would be lower if the interest rate were higher. 
D)  $727.28. It would be lower if the interest rate were higher. 
A)  $725.62. It would be higher if the interest rate were higher. 
B)  $727.28. It would be higher if the interest rate were higher. 
C)  $725.62. It would be lower if the interest rate were higher. 
D)  $727.28. It would be lower if the interest rate were higher.

Question 2

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Accepted Answer

The future

Question 3

The possibility of speculative bubbles in the stock market arises in part because

Accepted Answer

A)  stock prices may not depend at all on psychological factors. 
B)  fundamental analysis may be the correct way to evaluate the value of stocks. 
C)  future streams of dividend payments are very hard to estimate. 
D)  the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold. 
A)  stock prices may not depend at all on psychological factors. 
B)  fundamental analysis may be the correct way to evaluate the value of stocks. 
C)  future streams of dividend payments are very hard to estimate. 
D)  the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.

Question 4

Most financial decisions involve two related elements:

Accepted Answer

A)  advice and consent. 
B)  investment and taxes. 
C)  time and risk. 
D)  saving and consumption. 
A)  advice and consent. 
B)  investment and taxes. 
C)  time and risk. 
D)  saving and consumption.

Question 5

In effect, an annuity provides insurance

Accepted Answer

A)  against the risk of dying and leaving one's family without a regular income. 
B)  against the risk of living too long. 
C)  to people who are not risk-averse. 
D)  to people whose utility functions do not display the usual properties. 
A)  against the risk of dying and leaving one's family without a regular income. 
B)  against the risk of living too long. 
C)  to people who are not risk-averse. 
D)  to people whose utility functions do not display the usual properties.

Question 6

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Accepted Answer

A)  4 years 
B)  5 years 
C)  6 years 
D)  7 years 
A)  4 years 
B)  5 years 
C)  6 years 
D)  7 years

Question 7

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B)  Simpson announces that its profits were low, but not as low as the market had expected. 
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D)  All of the above would increase the price. 
A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B)  Simpson announces that its profits were low, but not as low as the market had expected. 
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D)  All of the above would increase the price.

Question 8

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Accepted Answer

A)  fundamental analysis is an efficient way to go about choosing which stocks to buy or sell. 
B)  stock prices move upward and downward "efficiently," rather than following a "random walk." 
C)  the stock market is "informationally efficient." 
D)  companies employ officers and managers who are well-qualified to perform their jobs. 
A)  fundamental analysis is an efficient way to go about choosing which stocks to buy or sell. 
B)  stock prices move upward and downward "efficiently," rather than following a "random walk." 
C)  the stock market is "informationally efficient." 
D)  companies employ officers and managers who are well-qualified to perform their jobs.

Question 9

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 10

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

Accepted Answer

A)  70/1 - r) years. 
B)  70/1 + r) years. 
C)  70/r years. 
D)  701 + r)/r years. 
A)  70/1 - r) years. 
B)  70/1 + r) years. 
C)  70/r years. 
D)  701 + r)/r years.

Question 11

Which of the following defines an annuity?

Accepted Answer

A)  For a fee, an insurance company provides you with regular income until you die. 
B)  A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C)  Annuity is another name for stock funds managed by mutual fund managers. 
D)  Annuity is another name for any diversified portfolio. 
A)  For a fee, an insurance company provides you with regular income until you die. 
B)  A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C)  Annuity is another name for stock funds managed by mutual fund managers. 
D)  Annuity is another name for any diversified portfolio.

Question 12

By diversifying, the risk of holding stock

Accepted Answer

A)  can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B)  can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C)  can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D)  can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
A)  can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B)  can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C)  can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D)  can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

Question 13

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A)  5 
B)  6 
C)  8 
D)  9 
A)  5 
B)  6 
C)  8 
D)  9

Question 14

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent

Question 15

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 16

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Accepted Answer

A)  rise, and investment spending rise. 
B)  rise, and investment spending fall. 
C)  fall, and investment spending rise. 
D)  fall, and investment spending fall. 
A)  rise, and investment spending rise. 
B)  rise, and investment spending fall. 
C)  fall, and investment spending rise. 
D)  fall, and investment spending fall.

Question 17

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

Accepted Answer

A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent 
A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent

Question 18

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A)  $240.38 
B)  $242.24 
C)  $244.40 
D)  None of the above are correct to the nearest cent. 
A)  $240.38 
B)  $242.24 
C)  $244.40 
D)  None of the above are correct to the nearest cent.

Question 19

If Alan is risk-averse, then he will always

Accepted Answer

A)  choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B)  choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C)  choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D)  All of the above are correct. 
A)  choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5. 
B)  choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5. 
C)  choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5. 
D)  All of the above are correct.

Question 20

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.

Exam 14: The Basic Tools of Finance

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

The possibility of speculative bubbles in the stock market arises in part because

Most financial decisions involve two related elements:

In effect, an annuity provides insurance

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

If the efficient market hypothesis is correct, then

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

Which of the following defines an annuity?

By diversifying, the risk of holding stock

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

If Alan is risk-averse, then he will always

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

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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