Question 1

You are expecting to receive $750 at some time in the future. Which of the following would unambiguously decrease the present value of this future payment?

Accepted Answer

A)  Interest rates rise and you get the payment sooner. 
B)  Interest rates rise and you have to wait longer for the payment. 
C)  Interest rates fall and you get the payment sooner. 
D)  Interest rates fall and you have to wait longer to get the payment. 
A)  Interest rates rise and you get the payment sooner. 
B)  Interest rates rise and you have to wait longer for the payment. 
C)  Interest rates fall and you get the payment sooner. 
D)  Interest rates fall and you have to wait longer to get the payment.

Question 2

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the lowest present value today?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 3

The efficient markets hypothesis says that

Accepted Answer

A)  only individual investors can make money in the stock market. 
B)  it should be easy to find stocks whose price differs from their fundamental value. 
C)  stock prices follow a random walk. 
D)  All of the above are correct. 
A)  only individual investors can make money in the stock market. 
B)  it should be easy to find stocks whose price differs from their fundamental value. 
C)  stock prices follow a random walk. 
D)  All of the above are correct.

Question 4

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following games might a risk-averse person play?

Accepted Answer

A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct. 
A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct.

Question 6

What is the future value of $375 at an interest rate of 3 percent one year from today?

Accepted Answer

A)  $371.75 
B)  $386.25 
C)  $393.33 
D)  None of the above are correct to the nearest cent. 
A)  $371.75 
B)  $386.25 
C)  $393.33 
D)  None of the above are correct to the nearest cent.

Question 7

Will is risk averse and has $1,000 with which to make a financial investment. He 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. Will should choose

Accepted Answer

A)  option A. 
B)  option B. 
C)  option C. 
D)  either option A or option B because Will is indifferent between those two options and they are superior to option C. 
A)  option A. 
B)  option B. 
C)  option C. 
D)  either option A or option B because Will is indifferent between those two options and they are superior to option C.

Question 8

Figure 27-4. The figure shows a utility function for Alex.  
-Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Accepted Answer

A)  the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth. 
B)  the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth. 
C)  the property of increasing utility does not apply to Alex. 
D)  the property of diminishing marginal utility does not apply to Alex. 
A)  the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth. 
B)  the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth. 
C)  the property of increasing utility does not apply to Alex. 
D)  the property of diminishing marginal utility does not apply to Alex.

Question 9

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A)  the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B)  the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C)  the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D)  This cannot be determined from the graph. 
A)  the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B)  the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C)  the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D)  This cannot be determined from the graph.

Question 10

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.

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 11

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 12

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)  Britney is risk averse. 
B)  Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of diminishing marginal utility applies to Britney. 
D)  All of the above are correct. 
A)  Britney is risk averse. 
B)  Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of diminishing marginal utility applies to Britney. 
D)  All of the above are correct.

Question 13

If the interest rate is 4%, in which of the following cases is the future value the largest?

Accepted Answer

A)  An initial value of $1,000 deposited for 5 years. 
B)  An initial value of $950 deposited for 6 years. 
C)  An initial value of $900 deposited for 7 years. 
D)  An initial value of $850 deposited for 8 years. 
A)  An initial value of $1,000 deposited for 5 years. 
B)  An initial value of $950 deposited for 6 years. 
C)  An initial value of $900 deposited for 7 years. 
D)  An initial value of $850 deposited for 8 years.

Question 14

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Accepted Answer

A)  $9,090.91 
B)  $10,000.00 
C)  $8,264.46 
D)  $9,523.81 
A)  $9,090.91 
B)  $10,000.00 
C)  $8,264.46 
D)  $9,523.81

Question 15

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

Accepted Answer

A)  $2,420.68 
B)  $2,591.85 
C)  $2,996.33 
D)  $3,040.63 
A)  $2,420.68 
B)  $2,591.85 
C)  $2,996.33 
D)  $3,040.63

Question 16

What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?

Accepted Answer

A)  $141.11 
B)  $141.36 
C)  $141.75 
D)  None of the above are correct to the nearest cent. 
A)  $141.11 
B)  $141.36 
C)  $141.75 
D)  None of the above are correct to the nearest cent.

Question 17

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

Accepted Answer

A)  benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own. 
B)  benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund. 
C)  eliminate market risk. 
D)  reduce the standard deviation of his or her portfolio to zero. 
A)  benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own. 
B)  benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund. 
C)  eliminate market risk. 
D)  reduce the standard deviation of his or her portfolio to zero.

Question 18

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

Accepted Answer

A)  4.88 percent 
B)  6.00 percent 
C)  12.36 percent 
D)  None of the above is correct. 
A)  4.88 percent 
B)  6.00 percent 
C)  12.36 percent 
D)  None of the above is correct.

Question 19

Which of the following is a source of market risk?

Accepted Answer

A)  Holding stocks in many companies carries the risk of a reduced average return. 
B)  Real GDP varies over time and sales and profits move with real GDP. 
C)  When a paper producer has declining sales, it is likely that so will other paper producers. 
D)  If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market. 
A)  Holding stocks in many companies carries the risk of a reduced average return. 
B)  Real GDP varies over time and sales and profits move with real GDP. 
C)  When a paper producer has declining sales, it is likely that so will other paper producers. 
D)  If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market.

Question 20

Scenario 27-1
Lisa has a utility function   where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for   .

Accepted Answer

Here is th

Exam 14: The Basic Tools of Finance

You are expecting to receive $750 at some time in the future. Which of the following would unambiguously decrease the present value of this future payment?

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the lowest present value today?

The efficient markets hypothesis says that

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Which of the following games might a risk-averse person play?

What is the future value of $375 at an interest rate of 3 percent one year from today?

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

If the interest rate is 4%, in which of the following cases is the future value the largest?

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?

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

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

Which of the following is a source of market risk?

Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for .

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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