Question 1

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Accepted Answer

A)   Higher average returns come at the price of higher risk.
B)   People who are risk averse should never hold stock.
C)   Diversification cannot eliminate all of the risk in stock portfolio.
D)   None of her conclusions are incorrect.E) C) and D)
F) B) and C)

Question 2

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Accepted Answer

Yes, according to the efficient markets ...

Question 3

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Accepted Answer

A) True 
 B)False

Question 4

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Accepted Answer

A)   It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in.
B)   Stock prices, even if not exactly a random walk, are very close to it.
C)   Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis.
D)   All of Chloe's conclusions are correct.E) A) and B)
F) All of the above

Question 5

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)   rises, so investment spending rises.
B)   falls, so investment spending rises.
C)   rises, so investment spending falls.
D)   falls, so investment spending falls.E) B) and D)
F) B) and C)

Question 6

Which of the following games might a risk-averse person play?

Accepted Answer

A)   a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1
B)   a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100
C)   a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1
D)   a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1E) All of the above
F) A) and D)

Question 7

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

Accepted Answer

A)   6 percent
B)   7 percent
C)   8 percent
D)   10 percentE) All of the above
F) B) and C)

Question 8

Until recently, shares of stock accounted for 40 percent of Jimmy's savings. A few days ago, Jimmy sold some bonds and bought some additional shares of stock. Now shares of stock account for 70 percent of Jimmy's savings. How did this change affect Jimmy's expected retun on his savings? How did it affect the risks he faces?

Accepted Answer

The increased percentage of st...

Question 9

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 D)
F) None of the above

Question 10

Which of the following has the highest future value?

Accepted Answer

A)   $100 saved for 2 years at 10 percent interest
B)   $110 saved for 2 years at 9 percent interest
C)   $120 saved for 2 years at 8 percent interest
D)   $130 saved for 2 years at 7 percent interestE) A) and D)
F) All of the above

Question 11

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Accepted Answer

A)   $500/(1.06) 2
B)   $500 - 500(1.06) 2 
C)   $500/(1.02) 6
D)   None of the above is correct.E) C) and D)
F) B) and D)

Question 12

Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work.

Accepted Answer

Jack's should remodel. The pre...

Question 13

What is meant by an asset bubble?

Accepted Answer

The price of an asse...

Question 14

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 15

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Accepted Answer

A)   conjectural mistake.
B)   fundamental mishap.
C)   speculative bubble.
D)   temporary inefficiency.E) A) and B)
F) None of the above

Question 16

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Accepted Answer

A)   2 percent
B)   3 percent
C)   4 percent
D)   5 percentE) A) and B)
F) All of the above

Question 17

Ronaldo's Foods considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?

Accepted Answer

A)   Interest rates rise and the cost of building the store rises.
B)   Interest rates rise and the cost of building the store falls.
C)   Interest rates fall and the cost of building the store rises.
D)   Interest rates fall and the cost of building the store falls.E) A) and D)
F) C) and D)

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.E) A) and B)
F) A) and C)

Question 19

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Accepted Answer

A)   $X(1 + rN) N
B)   $X(1 + r) N
C)   $X(1 + rN) 
D)   $X(1 + r/N) NE) All of the above
F) A) and B)

Question 20

If the interest rate is 4%, in which of the following cases is the future value the largest?

Accepted Answer

A)   An initial value of $1,000 deposited for 5 years.
B)   An initial value of $950 deposited for 6 years.
C)   An initial value of $900 deposited for 7 years.
D)   An initial value of $850 deposited for 8 years.E) A) and B)
F) A) and C)

Exam 27: The Basic Tools of Finance

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct Answer
verified

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

Correct Answer
verified

Which of the following has the highest future value?

Correct Answer
verified

Correct Answer
verified
Jack's should remodel. The pre...
View Answer

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Correct Answer
verified

Correct Answer
verified
The increased percentage of st...
View Answer

Which of the following games might a risk-averse person play?

Correct Answer
verified

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Correct Answer
verified

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Correct Answer
verified
Yes, according to the efficient markets ...
View Answer

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Correct Answer
verified

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Correct Answer
verified

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Correct Answer
verified

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

Correct Answer
verified

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

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,

Correct Answer
verified

Correct Answer
verified

What is meant by an asset bubble?

Correct Answer
verified
The price of an asse...
View Answer

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Correct Answer
verified

If the interest rate is 4%, in which of the following cases is the future value the largest?

Correct Answer
verified

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Correct Answer
verified

Exam 27: The Basic Tools of Finance

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct AnswerverifiedShow 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 has the highest future value?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedJack's should remodel. The pre...View AnswerShow Answer

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe increased percentage of st...View AnswerShow Answer

Which of the following games might a risk-averse person play?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Correct AnswerverifiedShow Answer

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Correct AnswerverifiedYes, according to the efficient markets ...View AnswerShow Answer

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Correct AnswerverifiedShow Answer

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Correct AnswerverifiedShow Answer

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

Correct AnswerverifiedShow Answer

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

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,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is meant by an asset bubble?

Correct AnswerverifiedThe price of an asse...View AnswerShow Answer

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

If the interest rate is 4%, in which of the following cases is the future value the largest?

Correct AnswerverifiedShow Answer

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Jack's should remodel. The pre...
View Answer

Correct Answer
verified

Correct Answer
verified
The increased percentage of st...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Yes, according to the efficient markets ...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The price of an asse...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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