Question 1

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Accepted Answer

A)   deadweight loss
B)   present value
C)   economic growth
D)   financial intermediationE) B) and C)
F) All of the above

Question 2

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Accepted Answer

A) True 
 B)False

Question 3

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Accepted Answer

A)   8 percent
B)   9 percent
C)   10 percent
D)   None of the above is correct.E) A) and D)
F) B) and D)

Question 4

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Accepted Answer

A)   she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails."
B)   the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth.
C)   the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth.
D)   the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.E) A) and B)
F) C) and D)

Question 5

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

Accepted Answer

A)   3
B)   4
C)   5
D)   7E) None of the above
F) C) and D)

Question 6

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Accepted Answer

A)   $400
B)   $800
C)   $1,600
D)   $3,200E) A) and D)
F) B) and C)

Question 7

Over the past two centuries, the average annual rates of return were about

Accepted Answer

A)   5 percent for stocks and about 1.5 percent for short-term government bonds.
B)   6 percent for stocks and about 2.5 percent for short-term government bonds.
C)   8 percent for stocks and about 3 percent for short-term government bonds.
D)   None of the above is correct.E) None of the above
F) A) and B)

Question 8

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)   $2,0001.06) 
B)   $1,000 + $1.06) 2
C)   $1,0001.06) 2
D)   None of the above are correct.E) None of the above
F) B) and C)

Question 9

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Accepted Answer

A)   $240 paid in three years
B)   $225 paid in two years
C)   $210 paid in one year
D)   $200 todayE) A) and D)
F) A) and C)

Question 10

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Accepted Answer

The future...

Question 11

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Accepted Answer

A)   both Irene's and Victor's
B)   Irene's but not Victor's
C)   Victor's but not Irene's
D)   neither Victor's nor Irene'sE) B) and C)
F) A) and C)

Question 12

No particular stock is a better buy than any other stock if

Accepted Answer

A)   stock prices are driven by investors' "animal spirits."
B)   the random-walk theory of stock prices is incorrect.
C)   the efficient markets hypothesis is correct.
D)   actively managed mutual funds always outperform index funds.E) B) and C)
F) None of the above

Question 13

In effect, an annuity provides insurance

Accepted Answer

A)   against the risk of dying and leaving one's family without a regular income.
B)   against the risk of living too long.
C)   to people who are not risk-averse.
D)   to people whose utility functions do not display the usual properties.E) A) and D)
F) A) and C)

Question 14

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Accepted Answer

A)   have no effect on its stock price.
B)   raise the price of the stock.
C)   lower the price of the stock.
D)   change the price of the stock in a random direction.E) None of the above
F) B) and C)

Question 15

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Accepted Answer

A)   and marginal utility function are both upward sloping.
B)   and marginal utility function are both downward sloping.
C)   is upward sloping and her marginal utility function is downward sloping.
D)   is downward sloping and her marginal utility function is upward sloping.E) B) and D)
F) A) and C)

Question 16

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Accepted Answer

A)   lower than about 5.5 percent.
B)   higher than about 5.5 percent.
C)   lower than about 7.5 percent.
D)   higher than about 7.5 percent.E) A) and C)
F) A) and B)

Question 17

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?

Accepted Answer

The present value of the futur...

Question 18

Diversification cannot reduce market risk.

Accepted Answer

A) True 
 B)False

Question 19

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Accepted Answer

A)   every risk-averse person will earn a higher rate of return than every non-risk-averse person.
B)   every risk-averse person will earn a lower rate of return than every non-risk-averse person.
C)   the average risk-averse person will earn a higher rate of return than the average non-risk-averse person.
D)   the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.E) A) and B)
F) B) and C)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 9: The Basic Tools of Finance

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Correct AnswerverifiedShow Answer

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Correct AnswerverifiedShow Answer

In effect, an annuity provides insurance

Correct AnswerverifiedShow Answer

Over the past two centuries, the average annual rates of return were about

Correct AnswerverifiedShow Answer

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Correct AnswerverifiedShow Answer

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Correct AnswerverifiedThe future...View AnswerShow Answer

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Correct AnswerverifiedShow Answer

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Correct AnswerverifiedShow Answer

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Correct AnswerverifiedShow Answer

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

No particular stock is a better buy than any other stock if

Correct AnswerverifiedShow Answer

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

Correct AnswerverifiedShow Answer

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?

Correct AnswerverifiedThe present value of the futur...View AnswerShow Answer

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

Diversification cannot reduce market risk.

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The future...
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The present value of the futur...
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