Question 1

If asset markets are driven by the "animal spirits" of investors, then

Accepted Answer

A)  those markets reflect rational behavior. 
B)  those markets reflect irrational behavior. 
C)  the efficient markets hypothesis is correct. 
D)  the stock market exhibits informational efficiency. 
A)  those markets reflect rational behavior. 
B)  those markets reflect irrational behavior. 
C)  the efficient markets hypothesis is correct. 
D)  the stock market exhibits informational efficiency.

Question 2

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Accepted Answer

A)  $8,225.06. 
B)  $7,920.94. 
C)  $7,672.58. 
D)  $6,998.98. 
A)  $8,225.06. 
B)  $7,920.94. 
C)  $7,672.58. 
D)  $6,998.98.

Question 3

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

Accepted Answer

Mark had more in his account.

Question 4

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Accepted Answer

A)  This stock is overvalued; you should consider adding it to your portfolio. 
B)  This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued; you should consider adding it to your portfolio. 
D)  This stock is undervalued; you shouldn't consider adding it to your portfolio. 
A)  This stock is overvalued; you should consider adding it to your portfolio. 
B)  This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued; you should consider adding it to your portfolio. 
D)  This stock is undervalued; you shouldn't consider adding it to your portfolio.

Question 5

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Accepted Answer

A)  deadweight loss 
B)  present value 
C)  economic growth 
D)  financial intermediation 
A)  deadweight loss 
B)  present value 
C)  economic growth 
D)  financial intermediation

Question 6

Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?

Accepted Answer

A)  Amy 
B)  Bill 
C)  Celia 
D)  They each get the same amount. 
A)  Amy 
B)  Bill 
C)  Celia 
D)  They each get the same amount.

Question 7

From the standpoint of the economy as a whole, the role of insurance is

Accepted Answer

A)  to entice risk-loving people to become risk averse. 
B)  to promote the phenomenon of adverse selection. 
C)  not to eliminate the risks inherent in life, but to spread them around more efficiently. 
D)  not to spread risks, but to eliminate them for individual policy holders. 
A)  to entice risk-loving people to become risk averse. 
B)  to promote the phenomenon of adverse selection. 
C)  not to eliminate the risks inherent in life, but to spread them around more efficiently. 
D)  not to spread risks, but to eliminate them for individual policy holders.

Question 8

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A)  $500(1.05)2 + $500/(1.05)2  
B)  $500(1.05)2 + $500 
C)  $500 + $500/(1.05)2  
D)  $500 + $500 
A)  $500(1.05)2 + $500/(1.05)2  
B)  $500(1.05)2 + $500 
C)  $500 + $500/(1.05)2  
D)  $500 + $500

Question 9

Diversification reduces

Accepted Answer

A)  only market risk. 
B)  only firm-specific risk. 
C)  neither market or firm-specific risk. 
D)  both market and firm-specific risk. 
A)  only market risk. 
B)  only firm-specific risk. 
C)  neither market or firm-specific risk. 
D)  both market and firm-specific risk.

Question 10

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 11

Figure 27-4. The figure shows a utility function for Alex.  
-Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain why

Accepted Answer

A)  people buy various types of insurance. 
B)  we observe a trade-off between risk and return. 
C)  most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets. 
D)  None of the above are correct. 
A)  people buy various types of insurance. 
B)  we observe a trade-off between risk and return. 
C)  most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets. 
D)  None of the above are correct.

Question 12

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $10,000 or (2) two annual payments, each in the amount of $5,200, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the immediate payment of $10,000 if the interest rate is

Accepted Answer

A)  2 percent, but not if the interest rate is 1 percent. 
B)  3 percent, but not if the interest rate is 2 percent. 
C)  4 percent, but not if the interest rate is 3 percent. 
D)  5 percent, but not if the interest rate is 4 percent. 
A)  2 percent, but not if the interest rate is 1 percent. 
B)  3 percent, but not if the interest rate is 2 percent. 
C)  4 percent, but not if the interest rate is 3 percent. 
D)  5 percent, but not if the interest rate is 4 percent.

Question 13

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Accepted Answer

A)  $25,962 
B)  $27,297 
C)  $30,188 
D)  None of the above are correct to the nearest dollar. 
A)  $25,962 
B)  $27,297 
C)  $30,188 
D)  None of the above are correct to the nearest dollar.

Question 14

Diminishing marginal utility of wealth implies that the utility function

Accepted Answer

A)  has increasing slope and a person is risk averse. 
B)  has increasing slope and a person is not risk averse. 
C)  has decreasing slope and a person is risk averse 
D)  has decreasing slope and a person is not risk averse. 
A)  has increasing slope and a person is risk averse. 
B)  has increasing slope and a person is not risk averse. 
C)  has decreasing slope and a person is risk averse 
D)  has decreasing slope and a person is not risk averse.

Question 15

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

Accepted Answer

A)  the first one 
B)  the second one 
C)  the third one 
D)  They all have the same balance. 
A)  the first one 
B)  the second one 
C)  the third one 
D)  They all have the same balance.

Question 16

Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?

Accepted Answer

A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent 
A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent

Question 17

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A)  80 to 100. 
B)  40 to 80. 
C)  10 to 20. 
D)  1 to 10. 
A)  80 to 100. 
B)  40 to 80. 
C)  10 to 20. 
D)  1 to 10.

Question 18

You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

Accepted Answer

A)  lower than about 8 percent. 
B)  higher than about 8 percent. 
C)  lower than about 10 percent. 
D)  higher than about 10 percent. 
A)  lower than about 8 percent. 
B)  higher than about 8 percent. 
C)  lower than about 10 percent. 
D)  higher than about 10 percent.

Question 19

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Accepted Answer

A)  raise the price of the corporation's stock; if it does not the stock is overvalued. 
B)  raise the price of the corporation's stock; if it does not the stock is undervalued. 
C)  reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D)  reduce the price of the corporation's stock; if it does not the stock is undervalued. 
A)  raise the price of the corporation's stock; if it does not the stock is overvalued. 
B)  raise the price of the corporation's stock; if it does not the stock is undervalued. 
C)  reduce the price of the corporation's stock; if it does not the stock is overvalued. 
D)  reduce the price of the corporation's stock; if it does not the stock is undervalued.

Question 20

The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

Accepted Answer

Using the Rule of 70

Exam 27: The Basic Tools of Finance

If asset markets are driven by the "animal spirits" of investors, then

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

From the standpoint of the economy as a whole, the role of insurance is

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Diversification reduces

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain why

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Diminishing marginal utility of wealth implies that the utility function

Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

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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