Question 1

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Accepted Answer

Only news that changes the pub

Question 2

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Accepted Answer

For example at 3 percent the p

Question 3

Sometimes On Time (SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

Accepted Answer

A)  a decrease in the price of a new jet or a decrease in the interest rate. 
B)  a decrease in the price of a new jet or an increase in the interest rate. 
C)  an increase in the price of a new jet or a decrease in the interest rate. 
D)  an increase in the price of a new jet or an increase in the interest rate. 
A)  a decrease in the price of a new jet or a decrease in the interest rate. 
B)  a decrease in the price of a new jet or an increase in the interest rate. 
C)  an increase in the price of a new jet or a decrease in the interest rate. 
D)  an increase in the price of a new jet or an increase in the interest rate.

Question 4

The performance of index funds

Accepted Answer

A)  usually falls short of the performance of actively-managed funds. 
B)  provides evidence in support of the notion that stock prices do not depend upon supply and demand. 
C)  provides evidence in support of the efficient markets hypothesis. 
D)  provides evidence in support of the notion that stock-market participants are irrational. 
A)  usually falls short of the performance of actively-managed funds. 
B)  provides evidence in support of the notion that stock prices do not depend upon supply and demand. 
C)  provides evidence in support of the efficient markets hypothesis. 
D)  provides evidence in support of the notion that stock-market participants are irrational.

Question 5

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

Accepted Answer

A)  $500(1 + r) + $10,500/(1 + r)2  
B)  $500/(1 + r) + $10,500/(1 + r)2  
C)  $11,000/(1 + r)2 
D)  $500(1 + r) + $10,500(1 + r)2 
A)  $500(1 + r) + $10,500/(1 + r)2  
B)  $500/(1 + r) + $10,500/(1 + r)2  
C)  $11,000/(1 + r)2 
D)  $500(1 + r) + $10,500(1 + r)2

Question 6

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Accepted Answer

A)  $110.00 two years from today. 
B)  $112.49 three years from today. 
C)  $116.00 four years from today. 
D)  $123.67 five years from today. 
A)  $110.00 two years from today. 
B)  $112.49 three years from today. 
C)  $116.00 four years from today. 
D)  $123.67 five years from today.

Question 7

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Accepted Answer

A)  $180 
A)  $220 
B)  $181.82 
D)  $222.22 
A)  $180 
A)  $220 
B)  $181.82 
D)  $222.22

Question 8

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Accepted Answer

A)  she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B)  the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C)  the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D)  the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth. 
A)  she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B)  the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C)  the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D)  the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.

Question 9

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

Accepted Answer

A)  stock prices follow a random walk. 
B)  the stock market is informationally efficient. 
C)  it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D)  All of the above are correct. 
A)  stock prices follow a random walk. 
B)  the stock market is informationally efficient. 
C)  it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D)  All of the above are correct.

Question 10

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Accepted Answer

A)  If it is "heads," she wins $100; if it is tails, she loses $95. 
B)  If it is "heads," she wins $150; if it is tails, she loses $150. 
C)  If it is "heads," she wins $150; if it is tails, she loses $140. 
D)  She definitely would not accept any of these bets. 
A)  If it is "heads," she wins $100; if it is tails, she loses $95. 
B)  If it is "heads," she wins $150; if it is tails, she loses $150. 
C)  If it is "heads," she wins $150; if it is tails, she loses $140. 
D)  She definitely would not accept any of these bets.

Question 11

The future value of a deposit in a savings account will be smaller

Accepted Answer

A)  the longer a person waits to withdraw the funds. 
B)  the lower the interest rate is. 
C)  the larger the initial deposit is. 
D)  All of the above are correct. 
A)  the longer a person waits to withdraw the funds. 
B)  the lower the interest rate is. 
C)  the larger the initial deposit is. 
D)  All of the above are correct.

Question 12

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Accepted Answer

The efficient markets hypothes

Question 13

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A)  "random walk" 
B)  "random bubble" 
C)  "speculative bubble" 
D)  "speculative hedge" 
A)  "random walk" 
B)  "random bubble" 
C)  "speculative bubble" 
D)  "speculative hedge"

Question 14

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Accepted Answer

A)  8 percent. 
B)  9 percent. 
C)  10 percent. 
D)  All of the above are correct. 
A)  8 percent. 
B)  9 percent. 
C)  10 percent. 
D)  All of the above are correct.

Question 15

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

Accepted Answer

A)  2 times 
B)  3 times 
C)  4 times 
D)  8 times 
A)  2 times 
B)  3 times 
C)  4 times 
D)  8 times

Question 16

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Accepted Answer

A)  $972.00 
B)  $973.44 
C)  $974.19 
D)  None of the above is correct. 
A)  $972.00 
B)  $973.44 
C)  $974.19 
D)  None of the above is correct.

Question 17

The efficient markets hypothesis implies that

Accepted Answer

A)  building a portfolio based on a published list of the "most respected" companies is likely to produce a better­ than-average return. 
B)  if a stock rose in price last year, it is likely to rise in price this year. 
C)  managed mutual funds should generally outperform indexed mutual funds. 
D)  None of the above are correct. 
A)  building a portfolio based on a published list of the "most respected" companies is likely to produce a better­ than-average return. 
B)  if a stock rose in price last year, it is likely to rise in price this year. 
C)  managed mutual funds should generally outperform indexed mutual funds. 
D)  None of the above are correct.

Question 18

Which of the following make(s) insurance premiums higher than otherwise?

Accepted Answer

A)  adverse selection and moral hazard 
B)  adverse selection, but not moral hazard 
C)  moral hazard, but not adverse selection 
D)  neither adverse selection nor moral hazard 
A)  adverse selection and moral hazard 
B)  adverse selection, but not moral hazard 
C)  moral hazard, but not adverse selection 
D)  neither adverse selection nor moral hazard

Question 19

A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?

Accepted Answer

A)  the announcement and the fall in interest rates 
B)  the announcement but not the fall in interest rates 
C)  the fall in interest rates, but not the announcement 
D)  neither the announcement nor the fall in interest rates 
A)  the announcement and the fall in interest rates 
B)  the announcement but not the fall in interest rates 
C)  the fall in interest rates, but not the announcement 
D)  neither the announcement nor the fall in interest rates

Question 20

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?

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

Exam 27: The Basic Tools of Finance

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Sometimes On Time (SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

The performance of index funds

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent? A) $180

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

The future value of a deposit in a savings account will be smaller

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

The efficient markets hypothesis implies that

Which of the following make(s) insurance premiums higher than otherwise?

A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?

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?

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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