Question 1

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A)   "random walk"
B)   "random bubble"
C)   "speculative bubble"
D)   "speculative hedge"E) C) and D)
F) B) and D)

Question 2

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) B) and C)
F) A) and D)

Question 3

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Accepted Answer

A)   If it is "heads," she wins $100; if it is tails, she loses $95.
B)   If it is "heads," she wins $150; if it is tails, she loses $150.
C)   If it is "heads," she wins $150; if it is tails, she loses $140.
D)   She definitely would not accept any of these bets.E) B) and D)
F) None of the above

Question 4

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

Accepted Answer

A)   $500(1 + r)  + $10,500/(1 + r) 2 
B)   $500/(1 + r)  + $10,500/(1 + r) 2 
C)   $11,000/(1 + r) 2
D)   $500(1 + r)  + $10,500(1 + r) 2E) A) and D)
F) B) and D)

Question 5

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?
A)  $180

Accepted Answer

A)   $220
B)   $181.82
D)   $222.22E) None of the above
F) B) and D)

Question 6

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Accepted Answer

For example at 3 percent the p...

Question 7

A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?

Accepted Answer

A)   the announcement and the fall in interest rates
B)   the announcement but not the fall in interest rates
C)   the fall in interest rates, but not the announcement
D)   neither the announcement nor the fall in interest ratesE) B) and D)
F) A) and B)

Question 8

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Accepted Answer

A)   $972.00
B)   $973.44
C)   $974.19
D)   None of the above is correct.E) A) and C)
F) All of the above

Question 9

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

Accepted Answer

A)   2 times
B)   3 times
C)   4 times
D)   8 timesE) C) and D)
F) A) and B)

Question 10

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.E) A) and B)
F) B) and D)

Question 11

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) B) and C)
F) A) and B)

Question 12

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Accepted Answer

The efficient markets hypothes...

Question 13

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

Accepted Answer

A)   stock prices follow a random walk.
B)   the stock market is informationally efficient.
C)   it is better to own stock in 20 companies than it is to own stock in 2 companies.
D)   All of the above are correct.E) A) and C)
F) B) and D)

Question 14

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.E) All of the above
F) B) and D)

Question 15

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

Accepted Answer

Only news that changes the pub...

Question 16

Which of the following make(s)  insurance premiums higher than otherwise?

Accepted Answer

A)   adverse selection and moral hazard
B)   adverse selection, but not moral hazard
C)   moral hazard, but not adverse selection
D)   neither adverse selection nor moral hazardE) A) and D)
F) None of the above

Question 17

The performance of index funds

Accepted Answer

A)   usually falls short of the performance of actively-managed funds.
B)   provides evidence in support of the notion that stock prices do not depend upon supply and demand.
C)   provides evidence in support of the efficient markets hypothesis.
D)   provides evidence in support of the notion that stock-market participants are irrational.E) A) and B)
F) A) and C)

Question 18

The efficient markets hypothesis implies that

Accepted Answer

A)   building a portfolio based on a published list of the "most respected" companies is likely to produce a better­ than-average return.
B)   if a stock rose in price last year, it is likely to rise in price this year.
C)   managed mutual funds should generally outperform indexed mutual funds.
D)   None of the above are correct.E) B) and C)
F) None of the above

Question 19

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Accepted Answer

A)   8 percent.
B)   9 percent.
C)   10 percent.
D)   All of the above are correct.E) A) and C)
F) A) and B)

Question 20

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Accepted Answer

A)   $110.00 two years from today.
B)   $112.49 three years from today.
C)   $116.00 four years from today.
D)   $123.67 five years from today.E) None of the above
F) B) and D)

Exam 27: The Basic Tools of Finance

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent? A) $180

Correct AnswerverifiedShow Answer

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct AnswerverifiedShow Answer

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Correct AnswerverifiedShow Answer

A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following make(s) insurance premiums higher than otherwise?

Correct AnswerverifiedShow Answer

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Correct AnswerverifiedFor example at 3 percent the p...View AnswerShow Answer

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

Correct AnswerverifiedShow Answer

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

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

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Correct AnswerverifiedShow Answer

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Correct AnswerverifiedShow Answer

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

The performance of index funds

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies that

Correct AnswerverifiedShow Answer

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Correct AnswerverifiedThe efficient markets hypothes...View AnswerShow Answer

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

Correct AnswerverifiedShow Answer

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedOnly news that changes the pub...View AnswerShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
For example at 3 percent the p...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The efficient markets hypothes...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Only news that changes the pub...
View Answer