Question 1

If the interest rate is r percent,then the rule of 70 says that your savings will double about every

Accepted Answer

A)   70/(1 - r) years.
B)   70/(1 + r) years.
C)   70/r years.
D)   70(1 + r) /r years.E) B) and D)
F) B) and C)

Question 2

Happy Trails,a bicycle rental company,is considering purchasing three additional bicycles.Each bicycle would cost them $249.66.At the end of the first year the increase to their revenues would be $140 per bicycle.At the end of the second year the increase to their revenues again would be $140 per bicycle.Thereafter,there are no increases to their revenues.At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) B) and C)
F) A) and B)

Question 3

The price of a bond is equal to the sum of the present values of its future payments.Suppose a certain bond pays $50 one year from today and $1,050 two years from today.What is the price of the bond if the interest rate is 5 percent?

Accepted Answer

A)   $1,050.00
B)   $1,045.35
C)   $1,000.00
D)   $945.35E) A) and D)
F) C) and D)

Question 4

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today.What is the present value of these payments?

Accepted Answer

A)   $2,000/(1 + r) 2.
B)   $1,000 + $1,000/(1 + r) 
C)   $1,000/(1 + r) + $1,000/(1 + r) 2
D)   $1,000(1 + r) + $1,000(1 + r) 2E) A) and D)
F) C) and D)

Question 5

A measure of the volatility of a variable is its

Accepted Answer

A)   present value.
B)   future value.
C)   return.
D)   standard deviation.E) B) and C)
F) A) and B)

Question 6

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A)   The insurance requirement and the credit check are both designed primarily to reduce adverse selection.
B)   The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard.
C)   The insurance requirement is designed primarily to reduce adverse selection;the credit check is designed primarily to reduce the risk of moral hazard.
D)   The insurance requirement is designed primarily to reduce the risk of moral hazard;the credit check is designed primarily to reduce adverse selection.E) A) and B)
F) A) and C)

Question 7

Which of the following games might a risk-averse person play?

Accepted Answer

A)   a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1
B)   a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100
C)   a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1
D)   All of the above are correct.E) A) and D)
F) A) and C)

Question 8

The fact that we observe a trade-off between risk and return is puzzling to economists,because that observation conflicts with the notion that most people are risk averse.

Accepted Answer

A) True 
 B)False

Question 9

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

Accepted Answer

A)   $766.50
B)   $768.75
C)   $770.23
D)   None of the above are correct to the nearest cent.E) A) and B)
F) All of the above

Question 10

Belinda knows that she has about $95 in her bank account.She knows she earned an interest rate of 4 percent,but she doesn't remember how much she opened the account with a year ago.How much did she put in?

Accepted Answer

A)   $91.00
B)   $91.20
C)   $91.27
D)   $91.35E) A) and C)
F) A) and B)

Question 11

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth and is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth and is not risk averse.E) A) and B)
F) All of the above

Question 12

Risk aversion helps to explain various things we observe in the economy,including

Accepted Answer

A)   adherence to the old adage,"Don't put all your eggs in one basket."
B)   insurance.
C)   the risk-return trade-off.
D)   All of the above are correct.E) A) and D)
F) All of the above

Question 13

Fourteen years ago William put money in his account at First National Bank.William decides to cash in his account and is told that his money has quadrupled.According to the rule of 70,what rate of interest did Alfred earn?

Accepted Answer

A)   5 percent
B)   7 percent
C)   10 percent
D)   14 percentE) B) and C)
F) None of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you'd use on your own car.

Accepted Answer

A)   Both examples primarily illustrate adverse selection.
B)   Both examples primarily illustrate moral hazard.
C)   The first example primarily illustrates adverse selection;the second primarily illustrates moral hazard.
D)   The first example primarily illustrates moral hazard;the second primarily illustrates adverse selection.E) None of the above
F) All of the above

Question 16

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today.If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years,then ZZL will undertake the project.

Accepted Answer

A) True 
 B)False

Question 17

A pharmaceutical company unexpectedly announces that it just developed an important new drug.This news should

Accepted Answer

A)   raise the price of the corporation's stock;if it does not the stock is overvalued.
B)   raise the price of the corporation's stock;if it does not the stock is undervalued.
C)   reduce the price of the corporation's stock;if it does not the stock is overvalued.
D)   reduce the price of the corporation's stock;if it does not the stock is undervalued.E) None of the above
F) A) and B)

Question 18

As the number of stocks in a person's portfolio increases,

Accepted Answer

A)   the risk of the portfolio increases,as indicated by the increasing value of the standard deviation of the portfolio.
B)   the risk of the portfolio increases,as indicated by the decreasing value of the standard deviation of the portfolio.
C)   the risk of the portfolio decreases,as indicated by the increasing value of the standard deviation of the portfolio.
D)   the risk of the portfolio decreases,as indicated by the decreasing value of the standard deviation of the portfolio.E) A) and B)
F) A) and C)

Question 19

In effect,an annuity provides insurance

Accepted Answer

A)   against the risk of dying and leaving one's family without a regular income.
B)   against the risk of living too long.
C)   to people who are not risk-averse.
D)   to people whose utility functions do not display the usual properties.E) A) and B)
F) None of the above

Question 20

List two ways a risk adverse person may attempt to reduce risks.

Accepted Answer

buy insurance
divers...

Exam 27: The Basic Tools of Finance

The fact that we observe a trade-off between risk and return is puzzling to economists,because that observation conflicts with the notion that most people are risk averse.

Correct Answer
verified

If the interest rate is r percent,then the rule of 70 says that your savings will double about every

Correct Answer
verified

Correct Answer
verified

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Correct Answer
verified

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today.If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years,then ZZL will undertake the project.

Correct Answer
verified

Risk aversion helps to explain various things we observe in the economy,including

Correct Answer
verified

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today.What is the present value of these payments?

Correct Answer
verified

In effect,an annuity provides insurance

Correct Answer
verified

The price of a bond is equal to the sum of the present values of its future payments.Suppose a certain bond pays $50 one year from today and $1,050 two years from today.What is the price of the bond if the interest rate is 5 percent?

Correct Answer
verified

A pharmaceutical company unexpectedly announces that it just developed an important new drug.This news should

Correct Answer
verified

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you'd use on your own car.

Correct Answer
verified

Belinda knows that she has about $95 in her bank account.She knows she earned an interest rate of 4 percent,but she doesn't remember how much she opened the account with a year ago.How much did she put in?

Correct Answer
verified

Which of the following games might a risk-averse person play?

Correct Answer
verified

List two ways a risk adverse person may attempt to reduce risks.

Correct Answer
verified
buy insurance
divers...
View Answer

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

Correct Answer
verified

Fourteen years ago William put money in his account at First National Bank.William decides to cash in his account and is told that his money has quadrupled.According to the rule of 70,what rate of interest did Alfred earn?

Correct Answer
verified

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Correct Answer
verified

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

Correct Answer
verified

A measure of the volatility of a variable is its

Correct Answer
verified

As the number of stocks in a person's portfolio increases,

Correct Answer
verified

Exam 27: The Basic Tools of Finance

The fact that we observe a trade-off between risk and return is puzzling to economists,because that observation conflicts with the notion that most people are risk averse.

Correct AnswerverifiedShow Answer

If the interest rate is r percent,then the rule of 70 says that your savings will double about every

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Correct AnswerverifiedShow Answer

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today.If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years,then ZZL will undertake the project.

Correct AnswerverifiedShow Answer

Risk aversion helps to explain various things we observe in the economy,including

Correct AnswerverifiedShow Answer

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today.What is the present value of these payments?

Correct AnswerverifiedShow Answer

In effect,an annuity provides insurance

Correct AnswerverifiedShow Answer

The price of a bond is equal to the sum of the present values of its future payments.Suppose a certain bond pays $50 one year from today and $1,050 two years from today.What is the price of the bond if the interest rate is 5 percent?

Correct AnswerverifiedShow Answer

A pharmaceutical company unexpectedly announces that it just developed an important new drug.This news should

Correct AnswerverifiedShow Answer

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you'd use on your own car.

Correct AnswerverifiedShow Answer

Belinda knows that she has about $95 in her bank account.She knows she earned an interest rate of 4 percent,but she doesn't remember how much she opened the account with a year ago.How much did she put in?

Correct AnswerverifiedShow Answer

Which of the following games might a risk-averse person play?

Correct AnswerverifiedShow Answer

List two ways a risk adverse person may attempt to reduce risks.

Correct Answerverifiedbuy insurancedivers...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Fourteen years ago William put money in his account at First National Bank.William decides to cash in his account and is told that his money has quadrupled.According to the rule of 70,what rate of interest did Alfred earn?

Correct AnswerverifiedShow Answer

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Correct AnswerverifiedShow Answer

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

Correct AnswerverifiedShow Answer

A measure of the volatility of a variable is its

Correct AnswerverifiedShow Answer

As the number of stocks in a person's portfolio increases,

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
buy insurance
divers...
View Answer

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Correct Answer
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