Question 1

Which,if any,of the present values below are computed correctly?

Accepted Answer

A)   A payment of $100 to be received one year from today,with a 2 percent interest rate,has a present value of $98.81.
B)   A payment of $200 to be received two years from today,with a 3 percent interest rate,has a present value of $188.52.
C)   A payment of $300 to be received three years from today,with a 4 percent interest rate,has a present value of $234.34.
D)   None of the above are correct to the nearest cent.E) B) and D)
F) C) and D)

Question 2

Bill gets medical insurance and then exercises less.Lilly has health concerns and so applies for medical insurance.Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu...

Question 3

The You Look Marvelous! cosmetic company is considering building a new shampoo factory.Its accountants and board of directors meet and decide that it is not a good idea to build the factory.If interest rates fall after the meeting

Accepted Answer

A)   the present value of the factory rises.It's more likely the company will build the factory.
B)   the present value of the factory rises.It's less likely the company will build the factory.
C)   the present value of the factory falls.It's more likely the company will build the factory.
D)   the present value of the factory falls.It's less likely the company will build the factory.E) None of the above
F) B) and C)

Question 4

One way to characterize the difference between compounding and discounting is to say that

Accepted Answer

A)   compounding involves the assumption that the interest rate is zero,whereas discounting does not involve that assumption.
B)   discounting involves the assumption that the interest rate is zero,whereas compounding does not involve that assumption.
C)   the process of compounding produces a future value,whereas the process of discounting produces a present value.
D)   the process of compounding produces a present value,whereas the process of discounting produces a future value.E) All of the above
F) C) and D)

Question 5

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Accepted Answer

A)   market risk by more than an increase from 110 to 120.
B)   market risk by less than an increase from 110 to 120.
C)   firm-specific risk by more than an increase from 110 to 120.
D)   firm-specific risk by less than an increase from 110 to 120.E) A) and D)
F) None of the above

Question 6

Natasha put $275 in the bank one year ago and forgot about it.Today,the bank sent her a notice indicating that she now has $291.50 in her account.What interest rate did she earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) All of the above
F) C) and D)

Question 7

The problem of moral hazard arises because

Accepted Answer

A)   life is full of all sorts of risks.
B)   after people buy insurance,they have less incentive to be careful about their risky behavior.
C)   a high-risk person is more likely to apply for insurance than is a low-risk person.
D)   insurance companies go to great effort to avoid paying claims to their policy holders.E) C) and D)
F) A) and D)

Question 8

Jorge deposited $1,000 into an account three years ago.The first two years he earned 5 percent interest;the third year he earned 6 percent interest.How much money does Jorge have in his account today?

Accepted Answer

A)   $1,157.90
B)   $1,168.65
C)   $1,176.00
D)   None of the above are correct to the nearest cent.E) A) and C)
F) A) and B)

Question 9

Research studies have shown that

Accepted Answer

A)   the correlation between how well a stock does one year and how well it does the next is significantly greater than zero.
B)   managed mutual funds generally outperform indexed mutual funds.
C)   people tend to be overconfident when making investment decisions.
D)   All of the above are correct.E) A) and C)
F) A) and D)

Question 10

The utility function of a risk-averse person has a

Accepted Answer

A)   positive slope and gets steeper as wealth increases.
B)   positive slope but gets flatter as wealth increases.
C)   negative slope but gets steeper as wealth increases.
D)   negative slope and gets flatter as wealth increases.E) A) and B)
F) A) and C)

Question 11

If you believe that stock prices follow a random walk,then probably you

Accepted Answer

A)   do not believe that there is positive relationship between risk and return.
B)   do not believe that stock prices reflect all available information.
C)   believe in the validity of the efficient markets hypothesis.
D)   believe that it is a good idea to engage in fundamental analysis.E) A) and C)
F) All of the above

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Diversification can reduce firm-specific risk.

Accepted Answer

A) True 
 B)False

Question 14

Figure 14-1.The figure shows a utility function. 
-Refer to Figure 14-1.What is measured along the vertical axis?

Accepted Answer

A)   risk aversion
B)   marginal utility
C)   utility
D)   the number of units of a good that can be purchasedE) All of the above
F) B) and C)

Question 15

$240 two years from today. Which of the following is correct?

Accepted Answer

A)   Option 1 has the highest present value and Option 2 has the lowest.
B)   Option 2 has the highest present value and Option 3 has the lowest.
C)   Option 3 has the highest present value and Option 1 has the lowest.
D)   None of the above is correct.E) B) and C)
F) C) and D)

Question 16

Which of the following is correct if the interest rate is 6 percent?

Accepted Answer

A)   $215 to be received a year from today has a present value of over $200;$420 a year from now has a present value over $400.
B)   $215 to be received a year from today has a present value of over $200;$420 a year from now has a present value under $400.
C)   $215 to be received a year from today has a present value of under $200;$420 a year from now has a present value over $400.
D)   $215 to be received a year from today has a present value of under $200;$420 a year from now has a present value under $400.E) A) and C)
F) B) and C)

Question 17

Which of the following changes would increase the present value of a future payment?

Accepted Answer

A)   an increase in the size of the payment
B)   an increase in the time until the payment is made
C)   an increase in the interest rate
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 18

Which of the following is adverse selection?

Accepted Answer

A)   the risk associated with selecting stocks in only a few specific companies
B)   the risk that a person will become overconfident in his ability to select stocks
C)   a high-risk person being more likely to apply for insurance
D)   after obtaining insurance a person having less incentive to be carefulE) B) and C)
F) None of the above

Question 19

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Accepted Answer

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

Question 20

Because the statistic called the standard deviation measures the volatility of a variable,it is used to measure the return of a portfolio.

Accepted Answer

A) True 
 B)False

Exam 27: The Basic Tools of Finance

Which,if any,of the present values below are computed correctly?

Correct AnswerverifiedShow Answer

Which of the following changes would increase the present value of a future payment?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Research studies have shown that

Correct AnswerverifiedShow Answer

Because the statistic called the standard deviation measures the volatility of a variable,it is used to measure the return of a portfolio.

Correct AnswerverifiedShow Answer

One way to characterize the difference between compounding and discounting is to say that

Correct AnswerverifiedShow Answer

Natasha put $275 in the bank one year ago and forgot about it.Today,the bank sent her a notice indicating that she now has $291.50 in her account.What interest rate did she earn?

Correct AnswerverifiedShow Answer

The You Look Marvelous! cosmetic company is considering building a new shampoo factory.Its accountants and board of directors meet and decide that it is not a good idea to build the factory.If interest rates fall after the meeting

Correct AnswerverifiedShow Answer

Jorge deposited $1,000 into an account three years ago.The first two years he earned 5 percent interest;the third year he earned 6 percent interest.How much money does Jorge have in his account today?

Correct AnswerverifiedShow Answer

Figure 14-1.The figure shows a utility function. -Refer to Figure 14-1.What is measured along the vertical axis?

Correct AnswerverifiedShow Answer

Which of the following is adverse selection?

Correct AnswerverifiedShow Answer

Bill gets medical insurance and then exercises less.Lilly has health concerns and so applies for medical insurance.Identify each of these as moral hazard or adverse selection.

Correct AnswerverifiedBill's behavior illu...View AnswerShow Answer

The problem of moral hazard arises because

Correct AnswerverifiedShow Answer

If you believe that stock prices follow a random walk,then probably you

Correct AnswerverifiedShow Answer

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Correct AnswerverifiedShow Answer

Diversification can reduce firm-specific risk.

Correct AnswerverifiedShow Answer

The utility function of a risk-averse person has a

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Correct AnswerverifiedShow Answer

$240 two years from today. Which of the following is correct?

Correct AnswerverifiedShow Answer

Which of the following is correct if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

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Bill's behavior illu...
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