Exam 16: Capital and Financial Markets

What is the expected return on a stock with a guaranteed dividend of $3 if there is a 30-percent chance its price could rise by 50 percent, a 30-percent chance its price could fall by 50 percent, and a 40-percent chance its price could stay constant at the present price of $60 per share?

The amount of principal that will be paid back when a bond matures is called the

The profit-maximizing principle that marginal revenue product equals the price of the input applies

The equilibrium risk-return relationship for a risk-averse individual shows

The stock of physical capital in the economy

Portfolio diversification

If a new tax is placed on a good with a vertical supply curve, the price paid by demanders

Systematic risk is reduced to zero as the number of different stocks in a portfolio increases.

If the implicit rental price of an airliner is $200,000 per year, the interest rate is 5 percent, and depreciation is $60,000 per year, then the purchase price of the airliner is

What is the difference between a debt contract and an equity contract?

Suppose a stock has a lower expected rate of return than a bank account. Then

If the stock market is efficient, then stockholders

The equilibrium risk-return curve for a risk-loving individual is

One possible role for government is to intervene to prevent the failure of large financial institutions and thereby prevent instability in the financial markets. Indeed, during 2008 the federal government intervened in several ways by loaning or investing funds to help some of these financial institutions.

Suppose the U.S. government issues a one-year Treasury bill with a face value of $5,000 and a $100 coupon payment. If the market interest rate is 9 percent, what is the market price of the bond based on its present discounted value? If bond prices rise by 4 percent, what must have happened to the market interest rate? Explain.

In reality, it has been confirmed that riskier investments yield higher average rates of return.

Which of the following is not an example of physical capital?

The table below contains information about a firm's marginal revenue product of capital. Suppose the rental price of capital is $425,000. How many units should the firm hire to maximize profit?

Suppose you are considering purchasing stock from two firms, firm A and firm B. The expected return is the same for both stocks; however, the return on stock A is more variable than the return on stock B. Which stock would you buy? Why? What do you think other investors will do? What will be the effect of investors' behavior on the relative prices of these two stocks?

Depreciation occurs when