Question 1

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

Accepted Answer

A)  X = 809.33 
B)  X = 855.56 
C)  X = 895.42 
D)  X = 916.74 
A)  X = 809.33 
B)  X = 855.56 
C)  X = 895.42 
D)  X = 916.74

Question 2

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

Accepted Answer

A)  $1,150.00 
B)  $1,157.63 
C)  $1,215.51 
D)  $1,250.00 
A)  $1,150.00 
B)  $1,157.63 
C)  $1,215.51 
D)  $1,250.00

Question 3

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Accepted Answer

A)  9% but not 10% 
B)  10% but not 11% 
C)  11% but not 12% 
D)  None of the above is correct; a risk averse person would not accept any of the above bets. 
A)  9% but not 10% 
B)  10% but not 11% 
C)  11% but not 12% 
D)  None of the above is correct; a risk averse person would not accept any of the above bets.

Question 4

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Accepted Answer

The presen

Question 5

Can insurance be thought of as diversification? Defend your answer.

Accepted Answer

Yes. It replaces a l

Question 6

Figure 27-3
The following figure shows the utility function for Paul.  
-Refer to Figure 27-3. Suppose the vertical distance between the points (0, A) and (0, B) is 10. If his wealth increased from $700 to $900, then

Accepted Answer

A)  Paul's utility would increase by less than 10 units. 
B)  Paul's utility would increase by more than 10 units. 
C)  Paul's utility would increase by exactly 10 units. 
D)  Any of the above could be correct. 
A)  Paul's utility would increase by less than 10 units. 
B)  Paul's utility would increase by more than 10 units. 
C)  Paul's utility would increase by exactly 10 units. 
D)  Any of the above could be correct.

Question 7

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Accepted Answer

A)  have no effect on its stock price. 
B)  raise the price of the stock. 
C)  lower the price of the stock. 
D)  change the price of the stock in a random direction. 
A)  have no effect on its stock price. 
B)  raise the price of the stock. 
C)  lower the price of the stock. 
D)  change the price of the stock in a random direction.

Question 8

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Accepted Answer

The presen

Question 9

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is

Accepted Answer

A)  $428.67. 
B)  $470.00. 
C)  $580.00. 1. 
D)  $583.20. 
A)  $428.67. 
B)  $470.00. 
C)  $580.00. 1. 
D)  $583.20.

Question 10

The market for insurance is one example of reducing risk by using diversification.

Accepted Answer

A) True 
 B)False

Question 11

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Accepted Answer

A)  $210 
B)  $220 
C)  $240 
D)  $250 
A)  $210 
B)  $220 
C)  $240 
D)  $250

Question 12

The value of a stock is based on the

Accepted Answer

A)  present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B)  present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C)  future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D)  future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
A)  present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. 
B)  present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. 
C)  future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. 
D)  future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.

Question 13

List two ways a risk adverse person may attempt to reduce risks.

Accepted Answer

buy insurance divers

Question 14

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

Accepted Answer

A)  $51,830.26 
B)  $54,464.96 
C)  $57,188.21 
D)  $58,237.71 
A)  $51,830.26 
B)  $54,464.96 
C)  $57,188.21 
D)  $58,237.71

Question 15

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Accepted Answer

A) True 
 B)False

Question 16

Writing in The Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

Accepted Answer

A)  was responsible for the financial crisis of 2008-2009. 
B)  was responsible for the Great Depression of the 1930s. 
C)  claims that prices observed in financial markets are always "right." 
D)  claims that prices observed in financial markets are mostly "wrong." 
A)  was responsible for the financial crisis of 2008-2009. 
B)  was responsible for the Great Depression of the 1930s. 
C)  claims that prices observed in financial markets are always "right." 
D)  claims that prices observed in financial markets are mostly "wrong."

Question 17

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

Accepted Answer

A)  $1,200.00 
B)  $1,111.77 
C)  $983.58 
D)  $859.09 
A)  $1,200.00 
B)  $1,111.77 
C)  $983.58 
D)  $859.09

Question 18

Svetlana is risk averse. Which of the following is correct about Svetlana?

Accepted Answer

A)  Her marginal utility of wealth increases as her income increases. 
B)  She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C)  Her utility function is a straight line. 
D)  None of the above are correct. 
A)  Her marginal utility of wealth increases as her income increases. 
B)  She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C)  Her utility function is a straight line. 
D)  None of the above are correct.

Question 19

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)  if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B)  Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C)  Alex is risk averse. 
D)  Alex is not risk averse. 
A)  if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B)  Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C)  Alex is risk averse. 
D)  Alex is not risk averse.

Question 20

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A)  $240.38 
A)  None of the above are correct to the nearest cent. 
B)  $242.24 
C)  $244.40 
A)  $240.38 
A)  None of the above are correct to the nearest cent. 
B)  $242.24 
C)  $244.40

Exam 27: The Basic Tools of Finance

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Can insurance be thought of as diversification? Defend your answer.

Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose the vertical distance between the points (0, A) and (0, B) is 10. If his wealth increased from $700 to $900, then

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is

The market for insurance is one example of reducing risk by using diversification.

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

The value of a stock is based on the

List two ways a risk adverse person may attempt to reduce risks.

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Writing in The Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

Svetlana is risk averse. Which of the following is correct about Svetlana?

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

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent? A) $240.38

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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