Question 1

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

Accepted Answer

A)  an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account 
B)  an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account 
C)  an interest rate of 3.5 percent, with the bank giving you a $100 bonus to 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 $50 processing fee at the time you open your account 
B)  an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account 
C)  an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account 
D)  an interest rate of 4.5 percent, with no processing fee and no bonus

Question 2

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 3

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 4

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Accepted Answer

A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio. 
A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.

Question 5

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Accepted Answer

A)  4 years 
B)  5 years 
C)  6 years 
D)  7 years 
A)  4 years 
B)  5 years 
C)  6 years 
D)  7 years

Question 6

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 7

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Accepted Answer

A)  a mutual fund. 
B)  an insurance company. 
C)  a diversified company. 
D)  an equity-financed company. 
A)  a mutual fund. 
B)  an insurance company. 
C)  a diversified company. 
D)  an equity-financed company.

Question 8

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

Accepted Answer

A)  raised both firm-specific risk and market risk. 
B)  raised firm-specific risk, but not market risk. 
C)  raised market risk, but not firm-specific risk. 
D)  None of the above is correct. 
A)  raised both firm-specific risk and market risk. 
B)  raised firm-specific risk, but not market risk. 
C)  raised market risk, but not firm-specific risk. 
D)  None of the above is correct.

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

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

Accepted Answer

A)  3 
B)  4 
C)  5 
D)  7 
A)  3 
B)  4 
C)  5 
D)  7

Question 11

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

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 12

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

Accepted Answer

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

Question 13

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Accepted Answer

The reduct

Question 14

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B)  increases the likely fluctuation in a portfolio's return, but reduces firm­specific risk.. 
C)  reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D)  reduces the likely fluctuation in a portfolio's return and reduces firm­specific risk. 
A)  increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B)  increases the likely fluctuation in a portfolio's return, but reduces firm­specific risk.. 
C)  reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D)  reduces the likely fluctuation in a portfolio's return and reduces firm­specific risk.

Question 15

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?

Accepted Answer

A)  3.5 
B)  7 
C)  14 
D)  None of the above is correct. 
A)  3.5 
B)  7 
C)  14 
D)  None of the above is correct.

Question 16

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Accepted Answer

A) True 
 B)False

Question 17

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

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 18

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Accepted Answer

A) True 
 B)False

Question 19

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 20

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Accepted Answer

A)  6 
B)  8 
C)  10 
D)  12 
A)  6 
B)  8 
C)  10 
D)  12

Exam 27: The Basic Tools of Finance

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

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

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 fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

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,

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

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

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Diversification

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

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

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

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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