Exam 14: The Basic Tools of Finance

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Rosie is risk averse and has $1,000 with which to make a financial investment. She 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. Rosie should choose

List three different ways that a risk-averse person can reduce financial risk.

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Scott Adams, creator of the comic strip Dilbert, has a theory that you should

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. For the person to whom this utility function applies,

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

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

The efficient markets hypothesis implies

In which of the following instances is the present value of the future payment the largest?

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $5,000 or (2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?