Question 1

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent C

Question 2

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces the present value of future payments. Investment spending is the purchasing of capital goods that are expected to raise future revenues. When interest rates rise, the present value of these future revenues decline so that fewer capital expenditures are likely to generate enough revenue to justify their price. Consequently firms will want to buy fewer capital goods and will demand a lower quantity of loanable funds.

Question 3

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

Accepted Answer

A)  have no effect on its 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 its 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. C

Question 4

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Accepted Answer

A)  7% 
B)  6% 
C)  5% 
D)  It is not profitable at any of these interest rates. 
A)  7% 
B)  6% 
C)  5% 
D)  It is not profitable at any of these interest rates.

Question 5

Marcia has four savings accounts. Which account has the largest balance?

Accepted Answer

A)  $100 deposited 1 year ago at an 8 percent interest rate 
B)  $100 deposited 2 years ago at a 4 percent interest rate 
C)  $100 deposited 4 years ago at a 2 percent interest rate 
D)  $100 deposited 8 years ago at a 1 percent interest rate 
A)  $100 deposited 1 year ago at an 8 percent interest rate 
B)  $100 deposited 2 years ago at a 4 percent interest rate 
C)  $100 deposited 4 years ago at a 2 percent interest rate 
D)  $100 deposited 8 years ago at a 1 percent interest rate

Question 6

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

Accepted Answer

A)  3 percent 
B)  5 percent 
C)  7 percent 
D)  9 percent 
A)  3 percent 
B)  5 percent 
C)  7 percent 
D)  9 percent

Question 7

Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay

Accepted Answer

A)  $140,000, but not $150,000. 
B)  $150,000, but not $160,000. 
C)  $160,000, but not $170,000. 
D)  $170,000, but not $180,000. 
A)  $140,000, but not $150,000. 
B)  $150,000, but not $160,000. 
C)  $160,000, but not $170,000. 
D)  $170,000, but not $180,000.

Question 8

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Accepted Answer

A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall. 
A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall.

Question 9

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?

Accepted Answer

A)  The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. 
B)  The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. 
C)  The interest rates on the two loans are the same. 
D)  There is not enough information to determine which loan has the higher interest rate. 
A)  The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. 
B)  The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. 
C)  The interest rates on the two loans are the same. 
D)  There is not enough information to determine which loan has the higher interest rate.

Question 10

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Accepted Answer

A)  marginal utility diminishes as wealth rises, so he must be risk averse. 
B)  marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse. 
C)  marginal utility increases as wealth rises, so he must be risk averse. 
D)  marginal utility increases as wealth rises, but we can't tell from this if he is risk averse. 
A)  marginal utility diminishes as wealth rises, so he must be risk averse. 
B)  marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse. 
C)  marginal utility increases as wealth rises, so he must be risk averse. 
D)  marginal utility increases as wealth rises, but we can't tell from this if he is risk averse.

Question 11

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Accepted Answer

A) True 
 B)False

Question 12

The risk of a portfolio

Accepted Answer

A)  increases as the number of stocks in the portfolio increases. 
B)  is usually measured using a statistic called the standard diversification. 
C)  is positively related to the average return of the portfolio. 
D)  bears no relationship to the average return of the portfolio. 
A)  increases as the number of stocks in the portfolio increases. 
B)  is usually measured using a statistic called the standard diversification. 
C)  is positively related to the average return of the portfolio. 
D)  bears no relationship to the average return of the portfolio.

Question 13

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
A)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.

Question 14

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Accepted Answer

A) True 
 B)False

Question 15

The possibility of speculative bubbles in the stock market arises in part because

Accepted Answer

A)  stock prices may not depend at all on psychological factors. 
B)  fundamental analysis may be the correct way to evaluate the value of stocks. 
C)  future streams of dividend payments are very hard to estimate. 
D)  the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold. 
A)  stock prices may not depend at all on psychological factors. 
B)  fundamental analysis may be the correct way to evaluate the value of stocks. 
C)  future streams of dividend payments are very hard to estimate. 
D)  the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.

Question 16

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Accepted Answer

A)  $95.50 
B)  $95.24 
C)  $95.00 
D)  None of the above are correct to the nearest cent. 
A)  $95.50 
B)  $95.24 
C)  $95.00 
D)  None of the above are correct to the nearest cent.

Question 17

Figure 9-4. The figure shows a utility function for Dexter.
  
-Refer to Figure 9-4. In what way(s) does the graph differ from the usual case?

Accepted Answer

A)  The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward-sloping. 
B)  The utility function shown here is bowed downward (convex), whereas in the usual case the utility function is bowed upward (concave). 
C)  On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D)  On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis. 
A)  The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward-sloping. 
B)  The utility function shown here is bowed downward (convex), whereas in the usual case the utility function is bowed upward (concave). 
C)  On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D)  On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.

Question 18

Figure 9-5. On the graph, x represents risk and y represents return.
  
-Refer to Figure 9-5. Point A represents a situation in which

Accepted Answer

A)  all of a person's savings are allocated to a class of safe assets. 
B)  the person knows with certainty that his or her return will be 3 percent. 
C)  the standard deviation of the person's portfolio is zero. 
D)  All of the above are correct. 
A)  all of a person's savings are allocated to a class of safe assets. 
B)  the person knows with certainty that his or her return will be 3 percent. 
C)  the standard deviation of the person's portfolio is zero. 
D)  All of the above are correct.

Question 19

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Accepted Answer

A)  $210 
B)  $220 
C)  $240 
D)  $250 
A)  $210 
B)  $220 
C)  $240 
D)  $250

Question 20

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Accepted Answer

A)  the efficient markets hypothesis is not a correct hypothesis. 
B)  the stock market is informationally efficient. 
C)  the stock market is informationally inefficient. 
D)  there is no reason to establish a diversified portfolio of stocks. 
A)  the efficient markets hypothesis is not a correct hypothesis. 
B)  the stock market is informationally efficient. 
C)  the stock market is informationally inefficient. 
D)  there is no reason to establish a diversified portfolio of stocks.

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

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

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Marcia has four savings accounts. Which account has the largest balance?

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

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?

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

The risk of a portfolio

Diversification

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

The possibility of speculative bubbles in the stock market arises in part because

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Figure 9-4. The figure shows a utility function for Dexter. -Refer to Figure 9-4. In what way(s) does the graph differ from the usual case?

Figure 9-5. On the graph, x represents risk and y represents return. -Refer to Figure 9-5. Point A represents a situation in which

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

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 Macroeconomic Models

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

Six Debates Over Macroeconomic Policy

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Exam 9: The Basic Tools of Finance

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

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

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Marcia has four savings accounts. Which account has the largest balance?

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

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?

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

The risk of a portfolio

Diversification

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

The possibility of speculative bubbles in the stock market arises in part because

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Figure 9-4. The figure shows a utility function for Dexter. -Refer to Figure 9-4. In what way(s) does the graph differ from the usual case?

Figure 9-5. On the graph, x represents risk and y represents return. -Refer to Figure 9-5. Point A represents a situation in which

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

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 Macroeconomic Models

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

Six Debates Over Macroeconomic Policy

Filters