Question 1

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Accepted Answer

A) True 
 B)False

Question 2

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Accepted Answer

A)  $2,000(1.06) 
B)  $1,000 + $(1.06)2  
C)  $1,000(1.06)2 
D)  None of the above are correct. 
A)  $2,000(1.06) 
B)  $1,000 + $(1.06)2  
C)  $1,000(1.06)2 
D)  None of the above are correct.

Question 3

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Accepted Answer

The presen

Question 4

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Accepted Answer

A)  the present value of the factory rises. It's more likely the company will build the factory. 
B)  the present value of the factory rises. It's less likely the company will build the factory. 
C)  the present value of the factory falls. It's more likely the company will build the factory. 
D)  the present value of the factory falls. It's less likely the company will build the factory. 
A)  the present value of the factory rises. It's more likely the company will build the factory. 
B)  the present value of the factory rises. It's less likely the company will build the factory. 
C)  the present value of the factory falls. It's more likely the company will build the factory. 
D)  the present value of the factory falls. It's less likely the company will build the factory.

Question 5

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

Accepted Answer

A)  the interest rate is to make sure that the price of bonds increases over time. 
B)  diversification is to eliminate market risk. 
C)  insurance is to reduce the risks inherent in life. 
D)  insurance is to spread risks around more efficiently. 
A)  the interest rate is to make sure that the price of bonds increases over time. 
B)  diversification is to eliminate market risk. 
C)  insurance is to reduce the risks inherent in life. 
D)  insurance is to spread risks around more efficiently.

Question 6

The field of finance primarily studies

Accepted Answer

A)  how society manages its scarce resources. 
B)  the implications of time and risk for allocating resources over time. 
C)  firms' decisions concerning how much to produce and what price to charge. 
D)  how society can reduce market risk. 
A)  how society manages its scarce resources. 
B)  the implications of time and risk for allocating resources over time. 
C)  firms' decisions concerning how much to produce and what price to charge. 
D)  how society can reduce market risk.

Question 7

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A)  Interest rates rise and truck prices rise. 
B)  Interest rates fall and truck prices rise. 
C)  Interest rates rise and truck prices fall. 
D)  Interest rates fall and truck prices fall. 
A)  Interest rates rise and truck prices rise. 
B)  Interest rates fall and truck prices rise. 
C)  Interest rates rise and truck prices fall. 
D)  Interest rates fall and truck prices fall.

Question 8

If the efficient markets hypothesis is correct, then

Accepted Answer

A)  the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B)  the stock market is informationally efficient. 
C)  stock prices never follow a random walk. 
D)  All of the above are correct. 
A)  the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B)  the stock market is informationally efficient. 
C)  stock prices never follow a random walk. 
D)  All of the above are correct.

Question 9

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Accepted Answer

A) True 
 B)False

Question 10

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Accepted Answer

A) True 
 B)False

Question 11

The present value of a payment to be made in the future falls as

Accepted Answer

A)  the interest rate rises and the time until the payment is made increases. 
B)  the interest rate rises and the time until the payment is made decreases. 
C)  the interest rate falls and the time until the payment is made increases. 
D)  the interest rate falls and the time until the payment is made decreases. 
A)  the interest rate rises and the time until the payment is made increases. 
B)  the interest rate rises and the time until the payment is made decreases. 
C)  the interest rate falls and the time until the payment is made increases. 
D)  the interest rate falls and the time until the payment is made decreases.

Question 12

Suppose that John can buy a savings bond for $500 that matures in ten years and pays John $1,000 with certainty. He is indifferent between this bond and another $500 bond that has some risk but on which the interest rate is 5% higher. How much, to the nearest penny, does the riskier bond pay in ten years?

Accepted Answer

A)  $1,275.91 
B)  $1,422.63 
C)  $1,577.69 
D)  $1,631.17 
A)  $1,275.91 
B)  $1,422.63 
C)  $1,577.69 
D)  $1,631.17

Question 13

Which of the following is a source of market risk?

Accepted Answer

A)  Holding stocks in many companies carries the risk of a reduced average return. 
B)  Real GDP varies over time and sales and profits move with real GDP. 
C)  When a paper producer has declining sales, it is likely that so will other paper producers. 
D)  If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market. 
A)  Holding stocks in many companies carries the risk of a reduced average return. 
B)  Real GDP varies over time and sales and profits move with real GDP. 
C)  When a paper producer has declining sales, it is likely that so will other paper producers. 
D)  If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market.

Question 14

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A)  4 percent. 
B)  6 percent. 
C)  8 percent. 
D)  All of the above are correct. 
A)  4 percent. 
B)  6 percent. 
C)  8 percent. 
D)  All of the above are correct.

Question 15

Which of the following best illustrates moral hazard?

Accepted Answer

A)  After a person obtains life insurance, she takes up skydiving. 
B)  A person obtains insurance knowing he is in poor health. 
C)  A person holds stock only in very risky corporations. 
D)  A person holds stocks from only a few corporations. 
A)  After a person obtains life insurance, she takes up skydiving. 
B)  A person obtains insurance knowing he is in poor health. 
C)  A person holds stock only in very risky corporations. 
D)  A person holds stocks from only a few corporations.

Question 16

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Accepted Answer

A)  market risk by more than an increase from 1 to 10. 
B)  market risk by less than an increase from 1 to 10. 
C)  firm-specific risk by more than an increase from 1 to 10. 
D)  firm-specific risk by less than an increase from 1 to 10. 
A)  market risk by more than an increase from 1 to 10. 
B)  market risk by less than an increase from 1 to 10. 
C)  firm-specific risk by more than an increase from 1 to 10. 
D)  firm-specific risk by less than an increase from 1 to 10.

Question 17

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of FineLine Corporation Stock fall?

Accepted Answer

A)  both the interest rate rising and the revenue announcement 
B)  neither the interest rate rising nor the revenue announcement 
C)  only the interest rate rising 
D)  only the revenue announcement 
A)  both the interest rate rising and the revenue announcement 
B)  neither the interest rate rising nor the revenue announcement 
C)  only the interest rate rising 
D)  only the revenue announcement

Question 18

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A)  $907.03 to be paid in two years 
B)  $1,000.01 to be paid in two years 
C)  $1,100.01 to be paid in two years 
D)  $1,102.51 to be paid in two years 
A)  $907.03 to be paid in two years 
B)  $1,000.01 to be paid in two years 
C)  $1,100.01 to be paid in two years 
D)  $1,102.51 to be paid in two years

Question 19

By diversifying, the risk of holding stock

Accepted Answer

A)  can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B)  can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C)  can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D)  can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
A)  can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B)  can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C)  can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D)  can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

Question 20

Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate at which Markovich still would be willing to build the plant?

Accepted Answer

A)  3 percent 
B)  3.5 percent 
C)  4 percent 
D)  4.5 percent 
A)  3 percent 
B)  3.5 percent 
C)  4 percent 
D)  4.5 percent

Exam 27: The Basic Tools of Finance

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

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

The field of finance primarily studies

If the efficient markets hypothesis is correct, then

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

The present value of a payment to be made in the future falls as

Which of the following is a source of market risk?

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Which of the following best illustrates moral hazard?

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

By diversifying, the risk of holding stock

Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate at which Markovich still would be willing to build the plant?

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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