Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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) All of the above
F) None of the above

Question 3

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Accepted Answer

A)  and marginal utility function are both upward sloping.
B)  and marginal utility function are both downward sloping.
C)  is upward sloping and her marginal utility function is downward sloping.
D)  is downward sloping and her marginal utility function is upward sloping.E) A) and D)
F) A) and C)

Question 4

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 5

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Accepted Answer

A)  an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account
B)  an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account
C)  an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account
D)  an interest rate of 4.5 percent, with no processing fee and no bonusE) A) and B)
F) None of the above

Question 6

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38. What rate of interest did Robert earn?

Accepted Answer

A)  4.5 percent
B)  5.5 percent
C)  6.5 percent
D)  8.0 percentE) All of the above
F) A) and C)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Figure 14-1. The figure shows a utility function. 
-Refer to Figure 14-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A)  the distance between the origin and point B
B)  the distance between the origin and point C
C)  the distance between point A and point C
D)  the distance between point B and point CE) None of the above
F) A) and B)

Question 9

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Accepted Answer

A)  $972.00
B)  $973.44
C)  $974.19
D)  None of the above is correct.E) A) and D)
F) B) and C)

Question 10

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Accepted Answer

A)  $1,000(1.06) 
B)  $1,000(1.06) 
C)  $1,000/(1.06) 
D)  None of the above is correct.E) None of the above
F) All of the above

Question 11

Which of the following make(s)  insurance premiums higher than otherwise?

Accepted Answer

A)  adverse selection and moral hazard
B)  adverse selection, but not moral hazard
C)  moral hazard, but not adverse selection
D)  neither adverse selection nor moral hazardE) All of the above
F) B) and D)

Question 12

If asset markets are driven by the "animal spirits" of investors, then

Accepted Answer

A)  those markets reflect rational behavior.
B)  those markets reflect irrational behavior.
C)  the efficient markets hypothesis is correct.
D)  the stock market exhibits informational efficiency.E) C) and D)
F) B) and D)

Question 13

The performance of index funds

Accepted Answer

A)  usually falls short of the performance of actively-managed funds.
B)  provides evidence in support of the notion that stock prices do not depend upon supply and demand.
C)  provides evidence in support of the efficient markets hypothesis.
D)  provides evidence in support of the notion that stock-market participants are irrational.E) B) and C)
F) All of the above

Question 14

Suppose that interest rates unexpectedly rise and that Carter Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of Carter Corporation Stock fall?

Accepted Answer

A)  both the interest rate rising and the revenue announcement
B)  neither the interest rate rising nor the revenue announcement
C)  only the interest rate rising
D)  only the revenue announcementE) A) and B)
F) C) and D)

Question 15

Diversification can reduce firm-specific risk.

Accepted Answer

A) True 
 B)False

Question 16

The concept of present value helps explain why

Accepted Answer

A)  investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
B)  investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases.
C)  the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases.
D)  None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.E) C) and D)
F) None of the above

Question 17

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Accepted Answer

A)  $1,160.00
B)  $1,166.40
C)  $1,168.65
D)  $1,169.64E) B) and C)
F) All of the above

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Accepted Answer

A)  4 percent
B)  5 percent
C)  6 percent
D)  None of the above would give a present value within a cent of $162.24.E) B) and D)
F) None of the above

Question 20

Which of the following is correct concerning diversification?

Accepted Answer

A)  It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
B)  It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30.
C)  It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
D)  None of the above is correct.E) A) and C)
F) B) and D)

Exam 14: The Basic Tools of Finance

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Correct Answer
verified

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Correct Answer
verified

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

Correct Answer
verified

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Correct Answer
verified

Which of the following is correct concerning diversification?

Correct Answer
verified

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Correct Answer
verified

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

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

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Correct Answer
verified

Diversification can reduce firm-specific risk.

Correct Answer
verified

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38. What rate of interest did Robert earn?

Correct Answer
verified

The concept of present value helps explain why

Correct Answer
verified

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

If asset markets are driven by the "animal spirits" of investors, then

Correct Answer
verified

The performance of index funds

Correct Answer
verified

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

Correct Answer
verified

Which of the following make(s) insurance premiums higher than otherwise?

Correct Answer
verified

Exam 14: The Basic Tools of Finance

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Correct AnswerverifiedShow Answer

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Correct AnswerverifiedShow Answer

Which of the following is correct concerning diversification?

Correct AnswerverifiedShow Answer

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

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

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Correct AnswerverifiedShow Answer

Diversification can reduce firm-specific risk.

Correct AnswerverifiedShow Answer

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38. What rate of interest did Robert earn?

Correct AnswerverifiedShow Answer

The concept of present value helps explain why

Correct AnswerverifiedShow Answer

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

If asset markets are driven by the "animal spirits" of investors, then

Correct AnswerverifiedShow Answer

The performance of index funds

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following make(s) insurance premiums higher than otherwise?

Correct AnswerverifiedShow Answer

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