Question 1

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Accepted Answer

A)  $22,880.00 
B)  $23,200.00 
C)  $23,232.00 
D)  $23,328.00

Question 2

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Accepted Answer

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

Question 3

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Accepted Answer

A)  2 percent 
B)  4 percent 
C)  6 percent 
D)  8 percent

Question 4

By holding insurance a person

Accepted Answer

A)  reduces the risk of a bad outcome, such as their house burning down. 
B)  shares risk and so reduces the burden of risk. 
C)  Both A and B are correct. 
D)  Neither A nor B are correct.

Question 5

Which of the following actions best illustrates moral hazard?

Accepted Answer

A)  A person adds risky stock to his portfolio. 
B)  A person who has narrowly avoided many accidents applies for automobile insurance. 
C)  A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D)  A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

Question 6

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

Accepted Answer

A)  Both examples primarily illustrate adverse selection. 
B)  Both examples primarily illustrate moral hazard. 
C)  The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. 
D)  The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.

Question 7

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Accepted Answer

A)  surplus, so its price will rise. 
B)  surplus, so its price will fall. 
C)  shortage, so its price will rise. 
D)  shortage, so its price will fall.

Question 8

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Accepted Answer

A)  Interest rates rise and you get the payment sooner. 
B)  Interest rates rise and you have to wait longer for the payment. 
C)  Interest rates fall and you get the payment sooner. 
D)  Interest rates fall and you have to wait longer to get the payment.

Question 9

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Accepted Answer

A)  $66,225.25 
B)  $67,556.42 
C)  $68,058.32 
D)  $71,428.57

Question 10

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A)  5 
B)  6 
C)  8 
D)  9

Question 11

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 12

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Accepted Answer

A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall.

Question 13

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 14

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Accepted Answer

The answer of Give two conditions that are important to...

Question 15

Braden says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest. Lefty says that the present value of $400 to be received one year from today if the interest rate is 4 percent exceeds the present value of $400 to be received two years from today if the interest rate is 2 percent.

Accepted Answer

A)  Braden and Lefty are both correct. 
B)  Braden and Lefty are both incorrect. 
C)  Only Braden is correct. 
D)  Only Lefty is correct.

Question 16

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

Accepted Answer

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

Question 17

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Accepted Answer

A)  This stock is undervalued; you should consider adding it to your portfolio. 
B)  This stock is undervalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is overvalued; you should consider adding it to your portfolio. 
D)  This stock is overvalued; you shouldn't consider adding it to your portfolio.

Question 18

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A)  the distance between the origin and point B 
B)  the distance between the origin and point C 
C)  the distance between point A and point C 
D)  the distance between point B and point C

Question 19

A risk-averse person

Accepted Answer

A)  has a utility curve where the slope increases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
B)  has a utility curve where the slope increases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
C)  has a utility curve where the slope decreases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
D)  has a utility curve where the slope decreases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.

Question 20

Define the efficient markets hypothesis.

Accepted Answer

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

Exam 27: The Basic Tools of Finance