Question 1

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Accepted Answer

A) fundamental analysis is an efficient way to go about choosing which stocks to buy or sell. 
B) stock prices move upward and downward "efficiently," rather than following a "random walk." 
C) the stock market is "informationally efficient." 
D) companies employ officers and managers who are well-qualified to perform their jobs. 
A) fundamental analysis is an efficient way to go about choosing which stocks to buy or sell. 
B) stock prices move upward and downward "efficiently," rather than following a "random walk." 
C) the stock market is "informationally efficient." 
D) companies employ officers and managers who are well-qualified to perform their jobs. C

Question 2

A firm has three different investment options, each costing $10 million. Option A will generate $12 million in revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option C will generate $18 million in revenue at the end of three years. Which option should the firm choose?

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) The answer depends on the rate of interest, which is not specified here. 
A) Option A 
B) Option B 
C) Option C 
D) The answer depends on the rate of interest, which is not specified here. D

Question 3

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Accepted Answer

The present value is $2,913.47.

Question 4

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

Accepted Answer

A) The first is lowest; the second is highest. 
B) The second is lowest; the third is highest. 
C) The third is lowest; the fourth is highest. 
D) The fourth is lowest; the first is highest. 
A) The first is lowest; the second is highest. 
B) The second is lowest; the third is highest. 
C) The third is lowest; the fourth is highest. 
D) The fourth is lowest; the first is highest.

Question 5

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu

Question 6

What is the future value of $500 one year from today if the interest rate is 6 percent?

Accepted Answer

A) $515 
B) $520 
C) $530 
D) None of the above is correct. 
A) $515 
B) $520 
C) $530 
D) None of the above is correct.

Question 7

Which of the following actions best illustrates adverse selection?

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. 
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 8

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $10,000 or (2) two annual payments, each in the amount of $5,200, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the immediate payment of $10,000 if the interest rate is

Accepted Answer

A) 2 percent, but not if the interest rate is 1 percent. 
B) 3 percent, but not if the interest rate is 2 percent. 
C) 4 percent, but not if the interest rate is 3 percent. 
D) 5 percent, but not if the interest rate is 4 percent. 
A) 2 percent, but not if the interest rate is 1 percent. 
B) 3 percent, but not if the interest rate is 2 percent. 
C) 4 percent, but not if the interest rate is 3 percent. 
D) 5 percent, but not if the interest rate is 4 percent.

Question 9

Black Oil Company considered building a service station in a new location. The owners and their accountants decided that this was the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the station changed. In which case do these changes both make it less likely that they will now build the station?

Accepted Answer

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

Question 10

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. 
A) $2,000/1.06 
B) $1000/(1.06)2 
C) $1000/(1 + 0.062) 
D) None of the above are correct.

Question 11

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False

Question 12

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 interest 
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 interest

Question 13

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Accepted Answer

A) a mutual fund. 
B) an insurance company. 
C) a diversified company. 
D) an equity-financed company. 
A) a mutual fund. 
B) an insurance company. 
C) a diversified company. 
D) an equity-financed company.

Question 14

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Accepted Answer

A) $2,000/(1 + r)2. 
B) $1,000 + $1,000/(1 + r) 
C) $1,000/(1 + r) + $1,000/(1 + r)2 
D) $1,000(1 + r) + $1,000(1 + r)2 
A) $2,000/(1 + r)2. 
B) $1,000 + $1,000/(1 + r) 
C) $1,000/(1 + r) + $1,000/(1 + r)2 
D) $1,000(1 + r) + $1,000(1 + r)2

Question 15

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

Accepted Answer

A) 8 years 
B) 10 years 
C) 12 years 
D) 14 years 
A) 8 years 
B) 10 years 
C) 12 years 
D) 14 years

Question 16

Scenario 27-1
Lisa has a utility function   where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $16 million with probability P and pays $4 million with probability (1-P). Given Lisa's utility function, how high does P need to be before Lisa will prefer option B?

Accepted Answer

Lisa will prefer option B if t

Question 17

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

Accepted Answer

The efficient markets hypothes

Question 18

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Accepted Answer

The future

Question 19

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

Accepted Answer

A) a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B) a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D) All of the above are correct. 
A) a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B) a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D) All of the above are correct.

Question 20

Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease

Accepted Answer

A) firm specific risk and market risk. 
B) firm specific risk but not market risk. 
C) market risk but not firm specific risk. 
D) neither firm specific nor market risk. 
A) firm specific risk and market risk. 
B) firm specific risk but not market risk. 
C) market risk but not firm specific risk. 
D) neither firm specific nor market risk.

Exam 27: Tools of Finance

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

What is the future value of $500 one year from today if the interest rate is 6 percent?

Which of the following actions best illustrates adverse selection?

What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?

The future value of $1 saved today is $1/(1 + r).

Which of the following has the highest future value?

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

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

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

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

Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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