Question 1

Fundamental analysis determines the value of a stock based on

Accepted Answer

A)  dividends. 
B)  the expected final sale price. 
C)  the ability of the corporation to earn profits. 
D)  All of the above are correct. 
A)  dividends. 
B)  the expected final sale price. 
C)  the ability of the corporation to earn profits. 
D)  All of the above are correct.

Question 2

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Accepted Answer

A)  chance of winning $120 in two years and the interest rate was 11%. 
B)  chance of winning $114 in two years and the interest rate was 7%. 
C)  chance of winning $110 in two years and the interest rate was 3%. 
D)  None of the above are correct; a risk averse person would not accept any of the above bets. 
A)  chance of winning $120 in two years and the interest rate was 11%. 
B)  chance of winning $114 in two years and the interest rate was 7%. 
C)  chance of winning $110 in two years and the interest rate was 3%. 
D)  None of the above are correct; a risk averse person would not accept any of the above bets.

Question 3

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Accepted Answer

A)  This stock is undervalued; you should consider adding it to your portfolio. 
B)  This stock is undervalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is overvalued; you should consider adding it to your portfolio. 
D)  This stock is overvalued; you shouldn't consider adding it to your portfolio. 
A)  This stock is undervalued; you should consider adding it to your portfolio. 
B)  This stock is undervalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is overvalued; you should consider adding it to your portfolio. 
D)  This stock is overvalued; you shouldn't consider adding it to your portfolio.

Question 4

Suppose the interest rate is 8 percent. Consider three payment options. 1. $300 today.
2) $330 one year from today.3.
$360 two years from today.
Which of the following is correct?

Accepted Answer

A)  1 has the highest present value and 2 has the lowest. 
B)  2 has the highest present value and 3 has the lowest. 
C)  3 has the highest present value and 1 has the lowest. 
D)  None of the above is correct. 
A)  1 has the highest present value and 2 has the lowest. 
B)  2 has the highest present value and 3 has the lowest. 
C)  3 has the highest present value and 1 has the lowest. 
D)  None of the above is correct.

Question 5

A firm has three different investment options, each costing $10 million. Option A will generate $12 million in revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option C will generate $18 million in revenue at the end of three years. Which option should the firm choose?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here. 
A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here.

Question 6

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by

Question 7

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

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 8

The financial system

Accepted Answer

A)  involves bank accounts, mortgages, stock prices, and many other items. 
B)  involves decisions and actions undertaken by people at a point in time that affect their lives in the future. 
C)  coordinates the economy's saving and investment. 
D)  All of the above are correct. 
A)  involves bank accounts, mortgages, stock prices, and many other items. 
B)  involves decisions and actions undertaken by people at a point in time that affect their lives in the future. 
C)  coordinates the economy's saving and investment. 
D)  All of the above are correct.

Question 9

The concept of present value helps explain why

Accepted Answer

A)  investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B)  investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C)  the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D)  None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases. 
A)  investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B)  investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C)  the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D)  None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

Question 10

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Accepted Answer

A)  both Irene's and Victor's 
B)  Irene's but not Victor's 
C)  Victor's but not Irene's 
D)  neither Victor's nor Irene's 
A)  both Irene's and Victor's 
B)  Irene's but not Victor's 
C)  Victor's but not Irene's 
D)  neither Victor's nor Irene's

Question 11

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Accepted Answer

A)  about 6.3 years 
B)  about 7 years 
C)  about 7.7 years 
D)  about 10 years 
A)  about 6.3 years 
B)  about 7 years 
C)  about 7.7 years 
D)  about 10 years

Question 12

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

A)  risk increases at an increasing rate. 
B)  risk increases at a decreasing rate. 
C)  risk decreases at an increasing rate. 
D)  risk decreases at a decreasing rate. 
A)  risk increases at an increasing rate. 
B)  risk increases at a decreasing rate. 
C)  risk decreases at an increasing rate. 
D)  risk decreases at a decreasing rate.

Question 13

Figure 27-4. The figure shows a utility function for Alex.  
-Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain why

Accepted Answer

A)  people buy various types of insurance. 
B)  we observe a trade-off between risk and return. 
C)  most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets. 
D)  None of the above are correct. 
A)  people buy various types of insurance. 
B)  we observe a trade-off between risk and return. 
C)  most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets. 
D)  None of the above are correct.

Question 14

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Accepted Answer

A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent 
A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent

Question 15

An asset market is said to experience a speculative bubble when

Accepted Answer

A)  the price of the asset rises above what appears to be its fundamental value. 
B)  the price of the asset appears to follow a random walk. 
C)  the market cannot establish an equilibrium price for the asset. 
D)  the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms. 
A)  the price of the asset rises above what appears to be its fundamental value. 
B)  the price of the asset appears to follow a random walk. 
C)  the market cannot establish an equilibrium price for the asset. 
D)  the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.

Question 16

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Accepted Answer

A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent 
A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent

Question 17

Over the past two centuries, the average annual rates of return were about

Accepted Answer

A)  5 percent for stocks and about 1.5 percent for short-term government bonds. 
B)  6 percent for stocks and about 2.5 percent for short-term government bonds. 
C)  8 percent for stocks and about 3 percent for short-term government bonds. 
D)  None of the above is correct. 
A)  5 percent for stocks and about 1.5 percent for short-term government bonds. 
B)  6 percent for stocks and about 2.5 percent for short-term government bonds. 
C)  8 percent for stocks and about 3 percent for short-term government bonds. 
D)  None of the above is correct.

Question 18

In answering which of the following questions would you find it necessary to calculate a present value?

Accepted Answer

A)  Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D)  You would find it necessary to calculate a present value in order to answer all of these questions. 
A)  Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D)  You would find it necessary to calculate a present value in order to answer all of these questions.

Question 19

Stock market fluctuations

Accepted Answer

A)  often go hand in hand with fluctuations in the economy more broadly. 
B)  rarely have anything to do with fluctuations in the economy more broadly. 
C)  have few, if any, macroeconomic implications. 
D)  are attributable to the widespread belief that the efficient markets hypothesis is correct. 
A)  often go hand in hand with fluctuations in the economy more broadly. 
B)  rarely have anything to do with fluctuations in the economy more broadly. 
C)  have few, if any, macroeconomic implications. 
D)  are attributable to the widespread belief that the efficient markets hypothesis is correct.

Question 20

Suppose your bank account pays a 4% interest rate. You are considering purchasing a share of stock in ABC Corporation for $500. The stock will pay you a $10 dividend at the end of years 1, 2, and 3. You expect to be able to sell the stock at the end of year 3 for $550. Is ABC a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of the inves

Exam 14: The Basic Tools of Finance

Fundamental analysis determines the value of a stock based on

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Suppose the interest rate is 8 percent. Consider three payment options. 1. $300 today. 2) $330 one year from today.3. $360 two years from today. Which of the following is correct?

List three different ways that a risk-averse person can reduce financial risk.

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

The financial system

The concept of present value helps explain why

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain why

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

An asset market is said to experience a speculative bubble when

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Over the past two centuries, the average annual rates of return were about

In answering which of the following questions would you find it necessary to calculate a present value?

Stock market fluctuations

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

Filters