Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?

Accepted Answer

A)  $415,000 if the interest rate is 5% 
B)  $419,000 if the interest rate is 4% 
C)  K-Nine would buy the equipment in both cases. 
D)  K-Nine would not buy the equipment in either case.

Question 3

Most financial decisions involve two related elements:

Accepted Answer

A)  advice and consent. 
B)  investment and taxes. 
C)  time and risk. 
D)  saving and consumption.

Question 4

Define the efficient markets hypothesis.

Accepted Answer

The answer of Define the efficient markets hypothesis....

Question 5

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 6

Which of the following best illustrates diversification?

Accepted Answer

A)  A company that produces many different products decides to produce fewer. 
B)  After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C)  Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services. 
D)  A person decides to purchase only stocks that have paid high dividends in the past.

Question 7

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Accepted Answer

A)  Abraham Lincoln 
B)  Thomas Edison 
C)  Benjamin Franklin 
D)  Albert Einstein

Question 8

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

Accepted Answer

A)  3 percent 
B)  5 percent 
C)  7 percent 
D)  9 percent

Question 9

Suppose your bank account pays a 5% interest rate. You are considering purchasing a share of stock in DH Corporation for $250. The stock will pay you a $10 dividend at the end of years 1, 2, 3, 4, and 5. You expect to be able to sell the stock at the end of year 5 for $300. Is DH a good investment? Provide evidence to support your answer.

Accepted Answer

The answer of Suppose your bank account pays a 5%...

Question 10

Clint puts $200 into an account when the interest rate is 8 percent. Later he checks his balance and finds that he has a balance of about $272.10. How many years did Clint wait to check his balance?

Accepted Answer

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

Question 11

Diversification cannot reduce market risk.

Accepted Answer

A) True 
 B)False

Question 12

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Accepted Answer

A)  market risk by more than an increase from 110 to 120. 
B)  market risk by less than an increase from 110 to 120. 
C)  firm-specific risk by more than an increase from 110 to 120. 
D)  firm-specific risk by less than an increase from 110 to 120.

Question 13

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Accepted Answer

A)  about 6.3 years 
B)  about 7 years 
C)  about 7.7 years 
D)  about 10 years

Question 14

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Accepted Answer

A)  $637.50 after 5 years and $822.09 after 10 years. 
B)  $637.50 after 5 years and $775.00 after 10 years. 
C)  $653.48 after 5 years and $854.07 after 10 years. 
D)  $688.36 after 5 years and $915.56 after 10 years.

Question 15

How does moral hazard matter in the market for insurance?

Accepted Answer

The answer of How does moral hazard matter in the...

Question 16

What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?

Accepted Answer

A)  $2,000/1.06 
B)  $1000/1.06)2 
C)  $1000/1 + 0.062) 
D)  None of the above are correct.

Question 17

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

The answer of If a savings account pays 7% interest,...

Question 18

Figure 27-3
The following figure shows the utility function for Paul. 
-Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Accepted Answer

A)  Paul would be willing to accept a coin­flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B)  the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. 
C)  the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. 
D)  the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth.

Question 19

The future value of a deposit in a savings account will be smaller

Accepted Answer

A)  the longer a person waits to withdraw the funds. 
B)  the lower the interest rate is. 
C)  the larger the initial deposit is. 
D)  All of the above are correct.

Question 20

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Accepted Answer

A)  $180 
B)  $181.82 
C)  $220 
D)  $222.22

Exam 19: The Basic Tools of Finance