Question 1

A financial instrument, by its possession, that entitles the holder to receive the payments are called:

Accepted Answer

A)   principal instruments.
B)   interest only instruments.
C)   registered instruments.
D)   bearer instruments. D

Question 2

An individual has an income of $4,000 in period 0 and $0 in period 1. The individual has the potential investment opportunities given below:
  An individual has income of $20,000 in period 0 and $42,000 in period 1. An investment opportunity that costs $15,000 in period 0 is worth $18,000 in period 1. The market interest rate is 6%. What is the maximum possible consumption in period 1 if the individual consumes $16,000 in period 0 and follows the NPV rule?

Accepted Answer

Individual must borrow $11,000 from period 1 income which comes at a cost of $11,000 (1.06) = $11,660. Therefore, max period 1 dollars is: $42,000 - $11,660 + $18,000 = $48,340

Question 3

One of the functions of financial intermediaries is to make sure the market clears. This means:

Accepted Answer

A)   setting the appropriate interest rates.
B)   recording the parties to the transactions.
C)   making sure the total amount to be lent equals the total amount to be borrowed.
D)   minimizing the spread between rates. B

Question 4

The ray that connects the maximum one can consume in Year 0 with the maximum one can consume in Year 1 represents:

Accepted Answer

A)   all the investment possibilities and has a slope equal to (1 + r) .
B)   all best consumption alternatives and has a slope equal to -(1 + r) .
C)   all the savings choices and has a slope equal to 1.
D)   all the best consumption choices and has a slope equal to 1.

Question 5

A lender with no investment opportunities has equal income in period 0 and in period 1. Which of the following correctly describes the consequence of an increase in the interest rate?

Accepted Answer

A)   Consumption in period 0 stays the same while consumption in period 1 decreases.
B)   Consumption in period 0 stays the same while consumption in period 1 increases.
C)   Consumption in period 0 increases while consumption in period 1 decreases.
D)   Consumption in period 0 decreases while consumption in period 1 stays the same.

Question 6

The separation theorem in financial markets is fundamental to allowing managers to maximize all shareholders wealth. Explain the separation theorem and how the financial markets provide for all different types of investors.

Accepted Answer

The answer of The separation theorem in financial markets is...

Question 7

If the amount of money to be lent is exactly equal to the amount desired to be borrowed then the market is cleared at:

Accepted Answer

A)   the equilibrium interest rate.
B)   the marginal rate of substitution.
C)   the crossover rate.
D)   the short term yield curve rate.

Question 8

Which of the following conditions do not characterize perfect capital markets?

Accepted Answer

A)   Trading is costless; access to the financial markets is free.
B)   Information about borrowing and lending opportunities is readily available.
C)   There are many traders; no single trader can have a significant impact on market prices.
D)   A few influential firms can control the financial market.

Question 9

The first or basic principle of finance dictates that an individual will invest in a project if:

Accepted Answer

A)   they are made better off in the financial markets.
B)   they are unable to adjust their savings and consumption in the financial markets.
C)   the project is at least as desirable as what is available in the financial markets.
D)   the interest rate for borrowing and lending is not equal.

Question 10

You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a net payoff $33,000 at the end of the year. If the market rate is 7.5% will you make the investment?

Accepted Answer

A)   No, because I need $280,000 more than I will have.
B)   Yes, because I will $3,000 above my required return.
C)   No, because I only get $33,000 back on my $400,000.
D)   Yes, because the market rate is less than the borrowing rate.

Question 11

An individual has $60,000 income in period 0 and $30,000 income in period 1. If the individual desires to consume $19,000 in period 1 and the market interest rate is 8%, what is the maximum amount of consumption in period 0?

Accepted Answer

A)   $50,000
B)   $70,185
C)   $71,000
D)   $61,880

Question 12

The following statement, that the value of an investment to an individual is not dependent on consumption preferences, is called the:

Accepted Answer

A)   marginal rate of substitution.
B)   separation theorem.
C)   value additivity principle.
D)   investor's dilemma.

Question 13

You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a payoff $433,000 at the end of the year. If the market rate is 8.25% what is the net present value?

Accepted Answer

A)   $33,000
B)   $433,000
C)   $0.00
D)   $23,100
E)   $30,485

Question 14

An individual has an income of $4,000 in period 0 and $0 in period 1. The individual has the potential investment opportunities given below:
  An individual has income of $15,000 in period 0 and $20,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $11,500 in period 1. The market interest rate is 8%. What is the maximum possible consumption in period 0 if the individual consumes $26,000 in period 1?

Accepted Answer

The answer of An individual has an income of $4,000...

Question 15

A corporation has the following opportunity to invest in a project with a return of $42,000 in one period. The current investment is $46,900. The financial market rate is 14%.
If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%. How much will the current shareholders earn.?

Accepted Answer

The answer of A corporation has the following opportunity to...

Question 16

According to the net present value rule, an investment should be made if:

Accepted Answer

A)   the net present value has no risk.
B)   the net present value is greater than the cost of investment.
C)   the net present value is less than present value.
D)   the net present value is more desired than consumption.
E)   the net present value is positive.

Question 17

An individual has an income of $4,000 in period 0 and $0 in period 1. The individual has the potential investment opportunities given below:
  Suppose that the market interest rate falls to 5%. What is the maximum possible consumption in period 1 if the individual takes on the optimal set of investment projects? 
D.
Period 1 consumption is $1,620 + $2,400 + $910 = $4,930

Accepted Answer

The answer of An individual has an income of $4,000...

Question 18

Diagrams illustrating the consumption choices for a corporation show the two period trade-off as originating in the northwest quadrant, or (-X, Y), because:

Accepted Answer

A)   corporations have a tendency to waste resources.
B)   unlike an individual, corporations have no consumption endowment.
C)   each investor cannot maximize their own consumption.
D)   people differ in tastes and preferences.

Question 19

An individual with no investment opportunities has income of $15,000 in period 0 and income of $10,000 in period 1. If the interest rate is 7%, which of the following points is on the individual's consumption possibility line?

Accepted Answer

A)   $3,000 in period 0 and $21,215 in period 1.
B)   $4,000 in period 0 and $21,116 in period 1.
C)   $10,000 in period 0 and $15,350 in period 1.
D)   $16,000 in period 0 and $9,000 in period.
E)   $18,800 in period 0 and $6,200 in period 1.

Question 20

A corporation has the following opportunity to invest in a project with a return of $42,000 in one period. The current investment is $46,900. The financial market rate is 14%.
The financial market rate is 5%. Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.) NPV = -42,000 + (46,900/1.05) = -

Accepted Answer