Question 1

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Accepted Answer

The answer of Write the formula for finding the future...

Question 2

Discuss the statistical evidence concerning the efficient markets hypothesis.

Accepted Answer

The evidence indicates that stock prices

Question 3

If Joanna is risk averse, then

Accepted Answer

A)  her utility function exhibits the property of decreasing utility. 
B)  her utility function exhibits the property of increasing marginal utility. 
C)  she dislikes bad things more than she likes comparable good things. 
D)  she is unlike most people, because most people are not risk averse. 
A)  her utility function exhibits the property of decreasing utility. 
B)  her utility function exhibits the property of increasing marginal utility. 
C)  she dislikes bad things more than she likes comparable good things. 
D)  she is unlike most people, because most people are not risk averse.

Question 4

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

A) True 
 B)False

Question 5

Suppose your bank account pays a 4% interest rate. You are considering purchasing a share of stock in ABC Corporation for $500. The stock will pay you a $10 dividend at the end of years 1, 2, and 3. You expect to be able to sell the stock at the end of year 3 for $550. Is ABC a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of the inves

Question 6

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Accepted Answer

A)  4 percent 
B)  6 percent 
C)  9 percent 
D)  11 percent 
A)  4 percent 
B)  6 percent 
C)  9 percent 
D)  11 percent

Question 7

Some people claim that stocks follow a random walk. What does this mean?

Accepted Answer

A)  The price of stock one day is about what it was on the previous day. 
B)  Changes in stock prices cannot be predicted from available information. 
C)  Stock prices are not determined by market fundamentals such as supply and demand. 
D)  Prices of stocks of different firms in the same industry show no or little tendency to move together. 
A)  The price of stock one day is about what it was on the previous day. 
B)  Changes in stock prices cannot be predicted from available information. 
C)  Stock prices are not determined by market fundamentals such as supply and demand. 
D)  Prices of stocks of different firms in the same industry show no or little tendency to move together.

Question 8

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

Accepted Answer

There are several possibilities. The fir

Question 9

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

Accepted Answer

A)  The first is lowest; the second is highest. 
B)  The second is lowest; the third is highest. 
C)  The third is lowest; the fourth is highest. 
D)  The fourth is lowest; the first is highest. 
A)  The first is lowest; the second is highest. 
B)  The second is lowest; the third is highest. 
C)  The third is lowest; the fourth is highest. 
D)  The fourth is lowest; the first is highest.

Question 10

The rule of 70 applies to a growing savings account but not to a growing economy.

Accepted Answer

A) True 
 B)False

Question 11

Stock market fluctuations

Accepted Answer

A)  often go hand in hand with fluctuations in the economy more broadly. 
B)  rarely have anything to do with fluctuations in the economy more broadly. 
C)  have few, if any, macroeconomic implications. 
D)  are attributable to the widespread belief that the efficient markets hypothesis is correct. 
A)  often go hand in hand with fluctuations in the economy more broadly. 
B)  rarely have anything to do with fluctuations in the economy more broadly. 
C)  have few, if any, macroeconomic implications. 
D)  are attributable to the widespread belief that the efficient markets hypothesis is correct.

Question 12

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Accepted Answer

A)  $2,000/(1 + r)2. 
B)  $1,000 + $1,000/(1 + r) 
C)  $1,000/(1 + r) + $1,000/(1 + r)2 
D)  $1,000(1 + r) + $1,000(1 + r)2 
A)  $2,000/(1 + r)2. 
B)  $1,000 + $1,000/(1 + r) 
C)  $1,000/(1 + r) + $1,000/(1 + r)2 
D)  $1,000(1 + r) + $1,000(1 + r)2

Question 13

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

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 14

Which of the following defines an annuity?

Accepted Answer

A)  For a fee, an insurance company provides you with regular income until you die. 
B)  A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C)  Annuity is another name for stock funds managed by mutual fund managers. 
D)  Annuity is another name for any diversified portfolio. 
A)  For a fee, an insurance company provides you with regular income until you die. 
B)  A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C)  Annuity is another name for stock funds managed by mutual fund managers. 
D)  Annuity is another name for any diversified portfolio.

Question 15

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Accepted Answer

A)  $9,090.91 
B)  $10,000.00 
C)  $8,264.46 
D)  $9,523.81 
A)  $9,090.91 
B)  $10,000.00 
C)  $8,264.46 
D)  $9,523.81

Question 16

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Accepted Answer

A)  $4,531.52 
B)  $4,878.52 
C)  $5,124.50 
D)  $5,516.91 
A)  $4,531.52 
B)  $4,878.52 
C)  $5,124.50 
D)  $5,516.91

Question 17

Risk

Accepted Answer

A)  can be reduced by placing a large number of small bets rather than a small number of large bets. 
B)  can be reduced by increasing the number of stocks in a portfolio. 
C)  Both A and B are correct. 
D)  Neither A nor B are correct. 
A)  can be reduced by placing a large number of small bets rather than a small number of large bets. 
B)  can be reduced by increasing the number of stocks in a portfolio. 
C)  Both A and B are correct. 
D)  Neither A nor B are correct.

Question 18

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

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 19

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Accepted Answer

A) True 
 B)False

Question 20

You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.

Accepted Answer

A)  8 percent, $15,000 
B)  7 percent, $16,000 
C)  6 percent, $17,000 
D)  All of the above are correct. 
A)  8 percent, $15,000 
B)  7 percent, $16,000 
C)  6 percent, $17,000 
D)  All of the above are correct.

Exam 27: The Basic Tools of Finance

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Discuss the statistical evidence concerning the efficient markets hypothesis.

If Joanna is risk averse, then

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Some people claim that stocks follow a random walk. What does this mean?

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

The rule of 70 applies to a growing savings account but not to a growing economy.

Stock market fluctuations

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Which of the following defines an annuity?

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Risk

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.

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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