Question 1

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Accepted Answer

A)  $500/(1.06)2 
B)  $500 - 500(1.06)2  
C)  $500/(1.02)6 
D)  None of the above is correct. 
A)  $500/(1.06)2 
B)  $500 - 500(1.06)2  
C)  $500/(1.02)6 
D)  None of the above is correct.

Question 2

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Accepted Answer

A)  Higher average returns come at the price of higher risk. 
B)  People who are risk averse should never hold stock. 
C)  Diversification cannot eliminate all of the risk in stock portfolio. 
D)  None of her conclusions are incorrect. 
A)  Higher average returns come at the price of higher risk. 
B)  People who are risk averse should never hold stock. 
C)  Diversification cannot eliminate all of the risk in stock portfolio. 
D)  None of her conclusions are incorrect.

Question 3

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

Accepted Answer

A)  a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B)  a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D)  a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1 
A)  a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B)  a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D)  a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1

Question 4

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 5

Ronaldo's Foods considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?

Accepted Answer

A)  Interest rates rise and the cost of building the store rises. 
B)  Interest rates rise and the cost of building the store falls. 
C)  Interest rates fall and the cost of building the store rises. 
D)  Interest rates fall and the cost of building the store falls. 
A)  Interest rates rise and the cost of building the store rises. 
B)  Interest rates rise and the cost of building the store falls. 
C)  Interest rates fall and the cost of building the store rises. 
D)  Interest rates fall and the cost of building the store falls.

Question 6

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Accepted Answer

A) True 
 B)False

Question 7

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Accepted Answer

Yes, according to the efficient markets

Question 8

Until recently, shares of stock accounted for 40 percent of Jimmy's savings. A few days ago, Jimmy sold some bonds and bought some additional shares of stock. Now shares of stock account for 70 percent of Jimmy's savings. How did this change affect Jimmy's expected retun on his savings? How did it affect the risks he faces?

Accepted Answer

The increased percentage of st

Question 9

Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work.

Accepted Answer

Jack's should remodel. The pre

Question 10

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 11

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Accepted Answer

A)  It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B)  Stock prices, even if not exactly a random walk, are very close to it. 
C)  Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis. 
D)  All of Chloe's conclusions are correct. 
A)  It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B)  Stock prices, even if not exactly a random walk, are very close to it. 
C)  Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis. 
D)  All of Chloe's conclusions are correct.

Question 12

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls. 
A)  rises, so investment spending rises. 
B)  falls, so investment spending rises. 
C)  rises, so investment spending falls. 
D)  falls, so investment spending falls.

Question 13

Figure 27-3
The following figure shows the utility function for Paul.  
-Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Accepted Answer

A)  Paul would be willing to accept a coin­flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B)  the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. 
C)  the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. 
D)  the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth. 
A)  Paul would be willing to accept a coin­flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B)  the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. 
C)  the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. 
D)  the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth.

Question 14

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Accepted Answer

A)  $X(1 + rN)N 
B)  $X(1 + r)N 
C)  $X(1 + rN) 
D)  $X(1 + r/N)N 
A)  $X(1 + rN)N 
B)  $X(1 + r)N 
C)  $X(1 + rN) 
D)  $X(1 + r/N)N

Question 15

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 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 16

What is meant by an asset bubble?

Accepted Answer

The price of an asse

Question 17

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Accepted Answer

A)  lower than about 5.5 percent. 
B)  higher than about 5.5 percent. 
C)  lower than about 7.5 percent. 
D)  higher than about 7.5 percent. 
A)  lower than about 5.5 percent. 
B)  higher than about 5.5 percent. 
C)  lower than about 7.5 percent. 
D)  higher than about 7.5 percent.

Question 18

Which of the following has the highest future value?

Accepted Answer

A)  $100 saved for 2 years at 10 percent interest 
B)  $110 saved for 2 years at 9 percent interest 
C)  $120 saved for 2 years at 8 percent interest 
D)  $130 saved for 2 years at 7 percent interest 
A)  $100 saved for 2 years at 10 percent interest 
B)  $110 saved for 2 years at 9 percent interest 
C)  $120 saved for 2 years at 8 percent interest 
D)  $130 saved for 2 years at 7 percent interest

Question 19

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Accepted Answer

A)  conjectural mistake. 
B)  fundamental mishap. 
C)  speculative bubble. 
D)  temporary inefficiency. 
A)  conjectural mistake. 
B)  fundamental mishap. 
C)  speculative bubble. 
D)  temporary inefficiency.

Question 20

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?

Accepted Answer

A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  10 percent 
A)  6 percent 
B)  7 percent 
C)  8 percent 
D)  10 percent

Exam 27: The Basic Tools of Finance

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

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

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

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

What is meant by an asset bubble?

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Which of the following has the highest future value?

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

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?

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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