Exam 14: The Basic Tools of Finance

La Rossa Pasta Company is considering expanding its factory. In which case would both the change in the cost and the change in the interest rate each make it less likely that La Rossa's would expand?

If a person is risk averse, then as wealth increases, total utility of wealth

Diversifying

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

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 $0 with probability 0.8 and pays $10 million with probability 0.2. Given Dave's utility function, will he prefer option A or option B? Provide evidence to support your answer.

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. What is measured along the vertical axis?

Svetlana is risk averse. Which of the following is correct about Svetlana?

If a stock or bond is risky

Risk aversion helps to explain various things we observe in the economy, including

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

Historically, stocks have offered higher rates of return than bonds.

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

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?