Exam 27: The Basic Tools of Finance

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

By holding insurance a person

Which of the following actions best illustrates moral hazard?

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Clint puts $200 into an account when the interest rate is 8 percent. Later he checks his balance and finds that he has a balance of about $272.10. How many years did Clint wait to check his balance?

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Braden says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest. Lefty says that the present value of $400 to be received one year from today if the interest rate is 4 percent exceeds the present value of $400 to be received two years from today if the interest rate is 2 percent.

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

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

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

A risk-averse person

Define the efficient markets hypothesis.