Question 1

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Accepted Answer

The answer of Suppose you place $500 into a savings...

Question 2

In answering which of the following questions would you find it necessary to calculate a future value?

Accepted Answer

A)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D)  You would find it necessary to calculate a future value in order to answer all of these questions.

Question 3

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

Accepted Answer

A)  4.88 percent 
B)  6.00 percent 
C)  12.36 percent 
D)  None of the above is correct.

Question 4

Rory receives, from an insurance company, a payment of $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called an)

Accepted Answer

A)  portfolio. 
B)  bond. 
C)  dividend. 
D)  annuity.

Question 5

At an annual interest rate of 10 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A)  8 
B)  10 
C)  12 
D)  14

Question 6

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks. Then we would expect to see

Accepted Answer

A)  the demand for bank stocks rise which would raise the prices of bank stocks. 
B)  the demand for bank stocks rise which would reduce the prices of bank stocks. 
C)  the demand for bank stocks fall which would raise the prices of bank stocks. 
D)  the demand for bank stocks fall which would reduce the prices of bank stocks.

Question 7

The efficient markets hypothesis implies

Accepted Answer

A)  that all stocks are fairly valued all the time and that no stock is a better buy than any other. 
B)  that all stocks are fairly valued all the time, but that some stocks may be better buys than other. 
C)  that some stocks may be better buys than others and stock experts can determine which ones. 
D)  that no stock is efficiently valued.

Question 8

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Accepted Answer

A) True 
 B)False

Question 9

After much anticipation a company releases a new smartphone. The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would

Accepted Answer

A)  raise the present value and the price of the corporation's stock. 
B)  raise the present value and reduce the price of the corporation's stock. 
C)  reduce the present value and the price of the corporation's stock. 
D)  reduce the present value and raise the price of the corporation's stock.

Question 10

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B)  Simpson announces that its profits were low, but not as low as the market had expected. 
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D)  All of the above would increase the price.

Question 11

The utility function of a risk-averse person has a

Accepted Answer

A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases.

Question 12

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 13

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A)  impossible. Many studies find that beating the market is, at best, extremely difficult. 
B)  impossible. Many studies find that beating the market is relatively easy. 
C)  relatively easy. Many studies find that beating the market is, at best, extremely difficult. 
D)  relatively easy. Many studies find that beating the market is relatively easy.

Question 14

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

Question 15

The performance of index funds

Accepted Answer

A)  usually falls short of the performance of actively-managed funds. 
B)  provides evidence in support of the notion that stock prices do not depend upon supply and demand. 
C)  provides evidence in support of the efficient markets hypothesis. 
D)  provides evidence in support of the notion that stock-market participants are irrational.

Question 16

Suppose you win a small lottery and you are given the following choice: You can receive 1) an immediate payment of $5,000 or 2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is

Accepted Answer

A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent.

Question 17

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.

Question 18

According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen's Leisure Company?

Accepted Answer

A)  Veblen announces, just as everyone had expected, that it has fired its CEO who has been accused of ethics violations. 
B)  Veblen announces, as the market had expected, that its profits were low. 
C)  Fundamental analysis published by KM Financial shows that Veblen's stock is undervalued. 
D)  A highly anticipated book is published by a Veblen insider which details Veblen's innovative technology in plain English, information that was previously unavailable to the public and which will now be used by Veblen's competitors.

Question 19

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

The answer of In the 1990s, several stocks had very,...

Question 20

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.

Exam 9: The Basic Tools of Finance