Question 1

What is the future value of $450 at an interest rate of 9 percent two years from today?

Accepted Answer

A)  $534.65 
B)  $546.35 
C)  $565.18 
D)  $574.13

Question 2

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Accepted Answer

A)  7% 
B)  6% 
C)  5% 
D)  It is not profitable at any of these interest rates.

Question 3

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Accepted Answer

A) True 
 B)False

Question 4

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

Accepted Answer

A)  5 percent 
B)  6 percent 
C)  7 percent 
D)  8 percent

Question 5

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

A) True 
 B)False

Question 6

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Accepted Answer

The answer of According to the efficient markets hypothesis, what...

Question 7

Write the formula for finding the future value in n years of $x today.

Accepted Answer

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

Question 8

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Accepted Answer

A)  Dexter's subjective measure of his well­being would increase by less than 12 units. 
B)  Dexter's subjective measure of his well­being would increase by more than 12 units. 
C)  Dexter would change from being a risk-averse person into a person who is not risk averse. 
D)  Dexter would forgo the insurance he bought when his wealth was $1,300.

Question 9

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A)  For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent. 
B)  For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
C)  For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
D)  For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.

Question 10

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Accepted Answer

A)  $1,160.00 
B)  $1,166.40 
C)  $1,168.65 
D)  $1,169.64

Question 11

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

The answer of A company has an investment project that...

Question 12

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Accepted Answer

A) True 
 B)False

Question 13

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 14

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

The answer of Give an example of adverse selection and...

Question 15

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Accepted Answer

A)  You receive the payment 2 years from now and the interest rate is 6 percent. 
B)  You receive the payment 2 years from now and the interest rate is 4 percent. 
C)  You receive the payment 3 years from now and the interest rate is 6 percent. 
D)  You receive the payment 3 years from now and the interest rate is 4 percent.

Question 16

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.

Question 17

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Accepted Answer

A)  $485.44. 
B)  $496.50. 
C)  $509.28. 
D)  $515.00.

Question 18

Diversifying

Accepted Answer

A)  increases the standard deviation of the value of a portfolio indicating its risk has increased. 
B)  increases the standard deviation of the value of a portfolio indicating its risk has decreased. 
C)  decreases the standard deviation of the value of a portfolio indicating its risk has increased. 
D)  decreases the standard deviation of the value of a portfolio indicating its risk has decreased.

Question 19

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

Accepted Answer

A)  about $860 
B)  about $870 
C)  about $880 
D)  about $890

Question 20

Sometimes On Time SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

Accepted Answer

A)  a decrease in the price of a new jet or a decrease in the interest rate. 
B)  a decrease in the price of a new jet or an increase in the interest rate. 
C)  an increase in the price of a new jet or a decrease in the interest rate. 
D)  an increase in the price of a new jet or an increase in the interest rate.

Exam 9: The Basic Tools of Finance

What is the future value of $450 at an interest rate of 9 percent two years from today?

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

Risk aversion simply means that people dislike bad things to happen.

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Write the formula for finding the future value in n years of $x today.

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

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

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

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

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Diversifying

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

Sometimes On Time SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either