Exam 14: The Basic Tools of Finance: Part B

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

According to fundamental analysis,when choosing stocks for your portfolio,you should prefer undervalued stocks.

If you believe the stock market is informationally efficient,then it is a waste of time to engage in fundamental analysis.

Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance.This is an example of the moral hazard problem associated with insurance.

If you are faced with the choice of receiving $500 today or $800 6 years from today,you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

A person who is risk averse will like gaining $1,000 more than they will dislike losing $1,000.

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

If the interest rate is 6 percent,then the present value of $5,000 received ten years from today is $2,583.34.

The rule of 70 applies to a growing savings account but not to a growing economy.

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

A person's subjective measure of well-being or satisfaction is called aversion.

If a savings account pays 5 percent annual interest,then the rule of 70 tells us that the account value will double in approximately 14 years.

If the interest rate is 5 percent,then receiving $1,000 eight years from now is worth more than receiving $700 today.

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

The sooner a payment is received and the higher the interest rate,the greater the present value of a future payment.

The market for insurance is one example of reducing risk by using diversification.

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years.PZX will forgo the project if the interest rate is higher than 10 percent.

In the 15 years ending February 2016,most active portfolio managers failed to beat the market.

According to the efficient markets hypothesis,at any moment in time,the market price is the best estimate of the company's value based on publicly available information.

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.