Question 1

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 2

Should a person who is risk averse hold a portfolio with no stock and only bonds?
Explain.

Accepted Answer

Not necessarily. Historically bonds have

Question 3

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Accepted Answer

A)  an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B)  an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C)  an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D)  an interest rate of 4.5 percent, with no processing fee and no bonus 
A)  an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B)  an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C)  an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D)  an interest rate of 4.5 percent, with no processing fee and no bonus

Question 4

The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?

Accepted Answer

A)  $415,000 if the interest rate is 5% 
B)  $419,000 if the interest rate is 4% 
C)  K-Nine would buy the equipment in both cases. 
D)  K-Nine would not buy the equipment in either case. 
A)  $415,000 if the interest rate is 5% 
B)  $419,000 if the interest rate is 4% 
C)  K-Nine would buy the equipment in both cases. 
D)  K-Nine would not buy the equipment in either case.

Question 5

Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?

Accepted Answer

A)  $3,180.00 
B)  $3,182.70 
C)  $3,183.62 
D)  None of the above are correct to the nearest cent. 
A)  $3,180.00 
B)  $3,182.70 
C)  $3,183.62 
D)  None of the above are correct to the nearest cent.

Question 6

A risk-averse person has

Accepted Answer

A)  utility and marginal utility curves that slope upward. 
B)  utility and marginal utility curves that slope downward. 
C)  a utility curve that slopes down and a marginal utility curve that slopes upward. 
D)  a utility curve that slopes upward and a marginal utility curve that slopes downward. 
A)  utility and marginal utility curves that slope upward. 
B)  utility and marginal utility curves that slope downward. 
C)  a utility curve that slopes down and a marginal utility curve that slopes upward. 
D)  a utility curve that slopes upward and a marginal utility curve that slopes downward.

Question 7

Which of the following changes would increase the present value of a future payment?

Accepted Answer

A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  a decrease in the interest rate 
D)  All of the above are correct. 
A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  a decrease in the interest rate 
D)  All of the above are correct.

Question 8

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?

Accepted Answer

A)  $1,050.00 
B)  $1,045.35 
C)  $1,000.00 
D)  $945.35 
A)  $1,050.00 
B)  $1,045.35 
C)  $1,000.00 
D)  $945.35

Question 9

Marcia has four savings accounts. Which account has the largest balance?

Accepted Answer

A)  $100 deposited 1 year ago at an 8 percent interest rate 
B)  $100 deposited 2 years ago at a 4 percent interest rate 
C)  $100 deposited 4 years ago at a 2 percent interest rate 
D)  $100 deposited 8 years ago at a 1 percent interest rate 
A)  $100 deposited 1 year ago at an 8 percent interest rate 
B)  $100 deposited 2 years ago at a 4 percent interest rate 
C)  $100 deposited 4 years ago at a 2 percent interest rate 
D)  $100 deposited 8 years ago at a 1 percent interest rate

Question 10

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 11

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

Accepted Answer

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

Question 12

An index fund

Accepted Answer

A)  holds only stocks and bonds that are indexed to inflation. 
B)  holds all the stocks in a given stock index. 
C)  guarantees a return that follows the index of leading economic indicators. 
D)  typically has a lower return than a managed fund. 
A)  holds only stocks and bonds that are indexed to inflation. 
B)  holds all the stocks in a given stock index. 
C)  guarantees a return that follows the index of leading economic indicators. 
D)  typically has a lower return than a managed fund.

Question 13

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)  A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B)  A person dislikes losing $400 more than he likes winning $400. 
C)  After obtaining automobile insurance a person drives less carefully than before. 
D)  A person intending to take up dangerous hobbies applies for life insurance. 
A)  A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B)  A person dislikes losing $400 more than he likes winning $400. 
C)  After obtaining automobile insurance a person drives less carefully than before. 
D)  A person intending to take up dangerous hobbies applies for life insurance.

Question 14

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 15

John has been a sky diver for many years. When the company John works for offers its employees the option to purchase a life insurance policy, John purchases a policy. This illustrates the problem of

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  risk-return tradeoff. 
D)  diversification. 
A)  moral hazard. 
B)  adverse selection. 
C)  risk-return tradeoff. 
D)  diversification.

Question 16

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

Accepted Answer

A)  5 percent 
B)  6 percent 
C)  7 percent 
D)  8 percent 
A)  5 percent 
B)  6 percent 
C)  7 percent 
D)  8 percent

Question 17

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Accepted Answer

A)  $3,494.40 
B)  $3,585.85 
C)  $3,601.89 
D)  $3,676.14 
A)  $3,494.40 
B)  $3,585.85 
C)  $3,601.89 
D)  $3,676.14

Question 18

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct, then what is the current interest rate?

Accepted Answer

A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  9 percent 
A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  9 percent

Question 19

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 27: The Basic Tools of Finance

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

Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?

A risk-averse person has

Which of the following changes would increase the present value of a future payment?

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?

Marcia has four savings accounts. Which account has the largest balance?

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

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

An index fund

Which of the following actions best illustrates adverse selection?

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.

John has been a sky diver for many years. When the company John works for offers its employees the option to purchase a life insurance policy, John purchases a policy. This illustrates the problem of

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct, then what is the current interest rate?

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

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

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

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

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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