Question 1

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A) $240.38 
B) $242.24 
C) $244.40 
D) None of the above are correct to the nearest penny. 
A) $240.38 
B) $242.24 
C) $244.40 
D) None of the above are correct to the nearest penny. A

Question 2

David increases the number of companies in which he holds stocks.

Accepted Answer

A) This reduces risk's standard deviation and firm-specific risk. 
B) This reduces risk's standard deviation and market risk. 
C) This raises market risk, but lowers firm-specific risk.What happens to overall risk is unclear. 
D) This raises firm-specific risk, but lowers market risk.What happens to overall risk is unclear. 
A) This reduces risk's standard deviation and firm-specific risk. 
B) This reduces risk's standard deviation and market risk. 
C) This raises market risk, but lowers firm-specific risk.What happens to overall risk is unclear. 
D) This raises firm-specific risk, but lowers market risk.What happens to overall risk is unclear. A

Question 3

Lucretia puts $400 into an account when the interest rate is 10 percent.Later she checks her balance and finds it's worth about $708.62.How many years did she wait to check her balance?

Accepted Answer

A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years 
A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years B

Question 4

Which of the following is the correct way to state the rule of 70? A variable with a growth rate of X percent

Accepted Answer

A) doubles every 70/x years. 
B) doubles every 70(1 - 1/x) years. 
C) doubles every 70/x² years. 
D) doubles every 70/(1 - x) years. 
A) doubles every 70/x years. 
B) doubles every 70(1 - 1/x) years. 
C) doubles every 70/x² years. 
D) doubles every 70/(1 - x) years.

Question 5

Robert is risk averse and has $1,000 with which to make a financial investment.He has three options.Option A is a risk-free government bond that pays 5 percent interest each year for two years.Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years.Option C is a high-risk stock that is expected to be worth about $1,200 in four years.Robert should choose

Accepted Answer

A) option a. 
B) option B. 
C) option C. 
D) either A or B because they are the same to him. 
A) option a. 
B) option B. 
C) option C. 
D) either A or B because they are the same to him.

Question 6

Historically,stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Question 7

Which,if any,of the present values below are correct?

Accepted Answer

A) $1,000 one year from today at 8 percent interest = $945.45 
B) $1,000 one year from today at 9 percent interest = $911.11 
C) $1,000 one year from today at 10 percent interest = $909.09 
D) None of the above are correct to the nearest penny. 
A) $1,000 one year from today at 8 percent interest = $945.45 
B) $1,000 one year from today at 9 percent interest = $911.11 
C) $1,000 one year from today at 10 percent interest = $909.09 
D) None of the above are correct to the nearest penny.

Question 8

The utility function of a risk-averse person has a

Accepted Answer

A) positive slope and gets steeper as wealth increases. 
B) positive slope but gets flatter as wealth increases. 
C) negative slope but gets steeper as wealth increases. 
D) negative slope and gets flatter as wealth increases. 
A) positive slope and gets steeper as wealth increases. 
B) positive slope but gets flatter as wealth increases. 
C) negative slope but gets steeper as wealth increases. 
D) negative slope and gets flatter as wealth increases.

Question 9

What is the future value in two years of $100 saved today and the present value of a promise of $100 to be paid two years from today if the interest rate is 10%?

Accepted Answer

A) $121.00, about $82.65 
B) $121.00, $80.00 
C) $120.00, about $82.65 
D) $120,00, $80.00 
A) $121.00, about $82.65 
B) $121.00, $80.00 
C) $120.00, about $82.65 
D) $120,00, $80.00

Question 10

An index fund

Accepted Answer

A) holds only stocks and bonds that are indexed to inflation. 
B) holds all the stocks in a given stock index. 
C) guarantees a return that follows the index of leading economic indicators. 
D) typically has a lower return than a managed fund. 
A) holds only stocks and bonds that are indexed to inflation. 
B) holds all the stocks in a given stock index. 
C) guarantees a return that follows the index of leading economic indicators. 
D) typically has a lower return than a managed fund.

Question 11

Which of the following changes would decrease the present value of a future payment?

Accepted Answer

A) a decrease in the size of the payment 
B) an increase in the time until the payment is made 
C) an increase in the interest rate 
D) All of the above are correct. 
A) a decrease in the size of the payment 
B) an increase in the time until the payment is made 
C) an increase in the interest rate 
D) All of the above are correct.

Question 12

You have a bond that you can redeem for $10,000 one year from now.The interest rate is 10 percent per year.How much is the bond worth today?

Accepted Answer

A) $9,090.91 
B) $10,000.00 
C) $8,264.46 
D) 9,523.81 
A) $9,090.91 
B) $10,000.00 
C) $8,264.46 
D) 9,523.81

Question 13

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you'd use on your own car.

Accepted Answer

A) Both examples primarily illustrate adverse selection. 
B) Both examples primarily illustrate moral hazard. 
C) The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. 
D) The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection. 
A) Both examples primarily illustrate adverse selection. 
B) Both examples primarily illustrate moral hazard. 
C) The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. 
D) The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.

Question 14

Edgar decided to increase the number of stocks in his portfolio.His actions reduced

Accepted Answer

A) both the firm-specific risk and the market risk of his portfolio. 
B) the firm-specific risk, but not the market risk of his portfolio. 
C) the market risk, but not the firm-specific risk of his portfolio. 
D) neither the aggregate nor the firm-specific risk of his portfolio. 
A) both the firm-specific risk and the market risk of his portfolio. 
B) the firm-specific risk, but not the market risk of his portfolio. 
C) the market risk, but not the firm-specific risk of his portfolio. 
D) neither the aggregate nor the firm-specific risk of his portfolio.

Question 15

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

Question 16

A measure of the volatility of a variable is its

Accepted Answer

A) present value. 
B) future value. 
C) return. 
D) standard deviation. 
A) present value. 
B) future value. 
C) return. 
D) standard deviation.

Question 17

What is the future value of $800 one year from today if the interest rate is 7 percent?

Accepted Answer

A) $747.66 
B) $756.00 
C) $856.00 
D) None of the above are correct to the nearest penny. 
A) $747.66 
B) $756.00 
C) $856.00 
D) None of the above are correct to the nearest penny.

Question 18

There are many concerns for risk-averse lenders.Consider the following: 1.Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans.2.Lenders are concerned that real GDP will decline leading to reduced corporate profits.3.Lenders are concerned that products produced by certain corporations will become obsolete.

Accepted Answer

A) 1 is market risk; 2 is firm-specific risk 
B) 2 is market risk; 3 is firm-specific risk 
C) 3 is market risk; 1 is firm-specific risk 
D) 2 is firm-specific risk; 3 is market risk 
A) 1 is market risk; 2 is firm-specific risk 
B) 2 is market risk; 3 is firm-specific risk 
C) 3 is market risk; 1 is firm-specific risk 
D) 2 is firm-specific risk; 3 is market risk

Question 19

Your parents put $500 into an account paying 7 percent interest for you when you were ten.Ten years later they tell you that you can take the money out of the account.What is the balance to the nearest penny?

Accepted Answer

A) $1,200.00 
B) $1,111.77 
C) $983.58 
D) $850.00 
A) $1,200.00 
B) $1,111.77 
C) $983.58 
D) $850.00

Question 20

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

Accepted Answer

A) have no effect on it's 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. 
A) have no effect on it's 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.

Exam 27: The Basic Tools of Finance

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

David increases the number of companies in which he holds stocks.

Lucretia puts $400 into an account when the interest rate is 10 percent.Later she checks her balance and finds it's worth about $708.62.How many years did she wait to check her balance?

Which of the following is the correct way to state the rule of 70? A variable with a growth rate of X percent

Historically,stocks have offered higher rates of return than bonds.

Which,if any,of the present values below are correct?

The utility function of a risk-averse person has a

What is the future value in two years of $100 saved today and the present value of a promise of $100 to be paid two years from today if the interest rate is 10%?

An index fund

Which of the following changes would decrease the present value of a future payment?

You have a bond that you can redeem for $10,000 one year from now.The interest rate is 10 percent per year.How much is the bond worth today?

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you'd use on your own car.

Edgar decided to increase the number of stocks in his portfolio.His actions reduced

Mary talked to several stockbrokers and made the following conclusions.Which,if any,of her conclusions are correct?

A measure of the volatility of a variable is its

What is the future value of $800 one year from today if the interest rate is 7 percent?

Your parents put $500 into an account paying 7 percent interest for you when you were ten.Ten years later they tell you that you can take the money out of the account.What is the balance to the nearest penny?

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

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

Supply, demand, and Government Policies

Consumers, producers, and the Efficiency of Markets

Application: 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

Oligopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment

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 Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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