Question 1

Which of the following is NOT used to describe an investment?

Accepted Answer

A)  It is a means of saving. 
B)  It is a way of acquiring capital. 
C)  It is an up-front cost. 
D)  It holds the expectation of generating future profits. 
A)  It is a means of saving. 
B)  It is a way of acquiring capital. 
C)  It is an up-front cost. 
D)  It holds the expectation of generating future profits. A

Question 2

If the real interest rate is 7.5% and the rate of inflation is 3%,what is the nominal interest rate?

Accepted Answer

A)  4.50% 
B)  4.57% 
C)  10.50% 
D)  10.73% 
A)  4.50% 
B)  4.57% 
C)  10.50% 
D)  10.73% D

Question 3

Jennifer has just finished high school and is deciding whether to start working or go to college.She has already been offered a job that pays $35,000 a year.Four years of college will cost $12,000 each year.She would earn an extra $20,000 each year after she graduates for the 45 years she plans on working until she retires.Assume that the interest rate is 8.5%.What is the net present value of the decision to invest in college?

Accepted Answer

A)  $136,877 
B)  $126,154 
C)  $12,487 
D)  $11,508 
A)  $136,877 
B)  $126,154 
C)  $12,487 
D)  $11,508 C

Question 4

A ______ is a legally binding promise to make specific future payments.

Accepted Answer

A)  stock 
B)  coupon 
C)  bond 
D)  deposit 
A)  stock 
B)  coupon 
C)  bond 
D)  deposit

Question 5

When someone buys a bond,they give up the bond's price in exchange for:

Accepted Answer

A)  right of ownership. 
B)  future income. 
C)  current income. 
D)  stock. 
A)  right of ownership. 
B)  future income. 
C)  current income. 
D)  stock.

Question 6

The NPV criterion states that an investment project is profitable when its NPV is ______ and unprofitable when its NPV is ______.

Accepted Answer

A)  positive; positive 
B)  positive; negative 
C)  negative; positive 
D)  negative; negative 
A)  positive; positive 
B)  positive; negative 
C)  negative; positive 
D)  negative; negative

Question 7

Suppose you invest $5,000 for 5 years.The interest rate for the first 2 years is 4.7%,5.2% for year 3 and 5.4% for the final 2 years.Assuming interest compounds annually,what would your investment have returned in those 5 years?

Accepted Answer

Y₂ = $5,000(1 + 0.047)² = $5,481

Question 8

Which statement about the Life Cycle Hypothesis is NOT true?

Accepted Answer

A)  It describes the choices of consumers who live for a long time. 
B)  It separates consumers' earnings into two stages. 
C)  It assumes that people prefer instability. 
D)  It assumes that people prefer a higher standard of living to a lower standard of living. 
A)  It describes the choices of consumers who live for a long time. 
B)  It separates consumers' earnings into two stages. 
C)  It assumes that people prefer instability. 
D)  It assumes that people prefer a higher standard of living to a lower standard of living.

Question 9

The amount of money borrowed in a transaction is called:

Accepted Answer

A)  interest. 
B)  principal. 
C)  internal rate of return. 
D)  present discounted value. 
A)  interest. 
B)  principal. 
C)  internal rate of return. 
D)  present discounted value.

Question 10

Table 10.1 shows the cash flows and discounted cash flows for three mutually exclusive projects available to a company.Assume an interest rate of 5%.Which project has the highest NPV?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  It cannot be determined from the information given. 
A)  Project A 
B)  Project B 
C)  Project C 
D)  It cannot be determined from the information given.

Question 11

A consumption bundle is affordable as long as:

Accepted Answer

A)  it is a point that is on an indifference curve that is to the right of the budget line. 
B)  it is a point that falls on the 45 degree line. 
C)  the present discount value of the consumption stream is less than the present discount value of the income stream. 
D)  the amount of the good consumed from year to year does not increase. 
A)  it is a point that is on an indifference curve that is to the right of the budget line. 
B)  it is a point that falls on the 45 degree line. 
C)  the present discount value of the consumption stream is less than the present discount value of the income stream. 
D)  the amount of the good consumed from year to year does not increase.

Question 12

What is another term for time value of money?

Accepted Answer

A)  Net present value 
B)  Internal rate of return 
C)  Opportunity cost of funds 
D)  Yield to maturity 
A)  Net present value 
B)  Internal rate of return 
C)  Opportunity cost of funds 
D)  Yield to maturity

Question 13

Refer to Figure 10.1.Suppose the individual is initially at point b.Based on the figure,the individual could afford to increase his utility by:

Accepted Answer

A)  consuming more today and less tomorrow. 
B)  consuming more today and more tomorrow. 
C)  consuming more tomorrow and less today. 
D)  consuming less today and less tomorrow. 
A)  consuming more today and less tomorrow. 
B)  consuming more today and more tomorrow. 
C)  consuming more tomorrow and less today. 
D)  consuming less today and less tomorrow.

Question 14

Refer to Figure 10.2.For an individual that prefers a stable living standard,which line represents the best feasible consumption path?

Accepted Answer

A)  a 
B)  b 
C)  c 
D)  h 
A)  a 
B)  b 
C)  c 
D)  h

Question 15

Which scenario has a higher present discounted value (assume interest is compounded annually); $100 received in 3 years if the interest rate is 8% or $90 received in 2 years if the interest rate is 7.25%?

Accepted Answer

A)  $100 owed in 3 years 
B)  $90 owed in 2 years 
C)  Both scenarios have the same present discounted value. 
D)  It cannot be determined with information provided. 
A)  $100 owed in 3 years 
B)  $90 owed in 2 years 
C)  Both scenarios have the same present discounted value. 
D)  It cannot be determined with information provided.

Question 16

Which of the following is NOT a reason why an increase in the interest rate usually makes investment projects less attractive?

Accepted Answer

A)  At a higher rate, future dollars are worth less compared to current dollars. 
B)  A typical investment project incurs the majority of its costs early in its life. 
C)  A typical investment project receives a disproportionate fraction of its revenue early in its life. 
D)  At a higher rate, putting money into the bank is more attractive. 
A)  At a higher rate, future dollars are worth less compared to current dollars. 
B)  A typical investment project incurs the majority of its costs early in its life. 
C)  A typical investment project receives a disproportionate fraction of its revenue early in its life. 
D)  At a higher rate, putting money into the bank is more attractive.

Question 17

Suppose you make $1,000 investment today that you believe will have a one-time return of $2,500 in 5 years.If the interest rate is 12%,will you have a profitable investment?

Accepted Answer

A)  Yes, because the NPV is positive 
B)  Yes, because the NPV is negative 
C)  No, because the NPV is positive 
D)  No, because the NPV is negative 
A)  Yes, because the NPV is positive 
B)  Yes, because the NPV is negative 
C)  No, because the NPV is positive 
D)  No, because the NPV is negative

Question 18

Suppose a consumer's utility function is U(F0,F1)= F00.6F10.4,where F0 represents food consumed this year and F1 represents food consumed next year.For that utility function,the marginal utility of food consumed this year is 0.6 × (F1/F0)0.4 and the marginal utility of food consumed next year is 0.4 × (F0/F1)0.6.Which of the following expressions gives the consumer's marginal rate of substitution for food this year with food next year (MRS01)?

Accepted Answer

A)  MRS01 = F1/F0 
B)  MRS01 = (2/3) × (F0/F1) 
C)  MRS01 = (2/3) × (F1/F0) 
D)  MRS01 = (3/2) × (F1/F0) 
A)  MRS01 = F1/F0 
B)  MRS01 = (2/3) × (F0/F1) 
C)  MRS01 = (2/3) × (F1/F0) 
D)  MRS01 = (3/2) × (F1/F0)

Question 19

A project is profitable when its internal rate of return is ______ the interest rate.

Accepted Answer

A)  greater than 
B)  less than 
C)  equal to 
D)  less variable 
A)  greater than 
B)  less than 
C)  equal to 
D)  less variable

Question 20

The amount of time required before a project's total inflows match its total outflows is the:

Accepted Answer

A)  break-even period. 
B)  payback period. 
C)  duration. 
D)  yield to maturity. 
A)  break-even period. 
B)  payback period. 
C)  duration. 
D)  yield to maturity.

Which of the following is NOT used to describe an investment?

If the real interest rate is 7.5% and the rate of inflation is 3%,what is the nominal interest rate?

A ______ is a legally binding promise to make specific future payments.

When someone buys a bond,they give up the bond's price in exchange for:

The NPV criterion states that an investment project is profitable when its NPV is and unprofitable when its NPV is .

Suppose you invest $5,000 for 5 years.The interest rate for the first 2 years is 4.7%,5.2% for year 3 and 5.4% for the final 2 years.Assuming interest compounds annually,what would your investment have returned in those 5 years?

Which statement about the Life Cycle Hypothesis is NOT true?

The amount of money borrowed in a transaction is called:

Table 10.1 shows the cash flows and discounted cash flows for three mutually exclusive projects available to a company.Assume an interest rate of 5%.Which project has the highest NPV?

A consumption bundle is affordable as long as:

What is another term for time value of money?

Refer to Figure 10.1.Suppose the individual is initially at point b.Based on the figure,the individual could afford to increase his utility by:

Refer to Figure 10.2.For an individual that prefers a stable living standard,which line represents the best feasible consumption path?

Which scenario has a higher present discounted value (assume interest is compounded annually); $100 received in 3 years if the interest rate is 8% or $90 received in 2 years if the interest rate is 7.25%?

Which of the following is NOT a reason why an increase in the interest rate usually makes investment projects less attractive?

Suppose you make $1,000 investment today that you believe will have a one-time return of $2,500 in 5 years.If the interest rate is 12%,will you have a profitable investment?

A project is profitable when its internal rate of return is ______ the interest rate.

The amount of time required before a project's total inflows match its total outflows is the:

Introduction

Supply and Demand

Balancing Benefits and Costs

Consumer Preferences

Constraints, Choices, and Demand

Demand and Welfare

Technology and Production

Cost

Profit Maximization

Choices Involving Risk

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Asymmetric Information

Filters

Exam 10: Choices Involving Time

Which of the following is NOT used to describe an investment?

If the real interest rate is 7.5% and the rate of inflation is 3%,what is the nominal interest rate?

A ______ is a legally binding promise to make specific future payments.

When someone buys a bond,they give up the bond's price in exchange for:

The NPV criterion states that an investment project is profitable when its NPV is ______ and unprofitable when its NPV is ______.

Suppose you invest $5,000 for 5 years.The interest rate for the first 2 years is 4.7%,5.2% for year 3 and 5.4% for the final 2 years.Assuming interest compounds annually,what would your investment have returned in those 5 years?

Which statement about the Life Cycle Hypothesis is NOT true?

The amount of money borrowed in a transaction is called:

Table 10.1 shows the cash flows and discounted cash flows for three mutually exclusive projects available to a company.Assume an interest rate of 5%.Which project has the highest NPV?

A consumption bundle is affordable as long as:

What is another term for time value of money?

Refer to Figure 10.1.Suppose the individual is initially at point b.Based on the figure,the individual could afford to increase his utility by:

Refer to Figure 10.2.For an individual that prefers a stable living standard,which line represents the best feasible consumption path?

Which scenario has a higher present discounted value (assume interest is compounded annually); $100 received in 3 years if the interest rate is 8% or $90 received in 2 years if the interest rate is 7.25%?

Which of the following is NOT a reason why an increase in the interest rate usually makes investment projects less attractive?

Suppose you make $1,000 investment today that you believe will have a one-time return of $2,500 in 5 years.If the interest rate is 12%,will you have a profitable investment?

A project is profitable when its internal rate of return is ______ the interest rate.

The amount of time required before a project's total inflows match its total outflows is the:

Introduction

Supply and Demand

Balancing Benefits and Costs

Consumer Preferences

Constraints, Choices, and Demand

Demand and Welfare

Technology and Production

Cost

Profit Maximization

Choices Involving Risk

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Asymmetric Information

Filters

The NPV criterion states that an investment project is profitable when its NPV is and unprofitable when its NPV is .