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Allen Steel Company is considering whether to build a new mill. If the interest rate rises,


A) the present value of the returns from the mill will fall, so Allen will be less likely to build the mill.
B) the present value of the returns from the mill will fall, so Allen will be more likely to build the mill.
C) the present value of the returns from the mill will rise, so Allen will be less likely to build the mill.
D) the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.

E) C) and D)
F) B) and D)

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In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

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There are several possibilities. The fir...

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


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

E) B) and C)
F) A) and B)

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Figure 9-2. The figure shows a utility function for Mary Ann. Figure 9-2. The figure shows a utility function for Mary Ann. -Refer to Figure 9-2. From the appearance of the utility function, we know that A) if Mary Ann owns a house, she would not consider buying fire insurance. B) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. C) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. D) All of the above are correct. -Refer to Figure 9-2. From the appearance of the utility function, we know that


A) if Mary Ann owns a house, she would not consider buying fire insurance.
B) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.
C) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
D) All of the above are correct.

E) B) and C)
F) C) and D)

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Figure 9-1. The figure shows a utility function. Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D) -Refer to Figure 9-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?


A) Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)
B) Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)
C) Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)
D) Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)

E) C) and D)
F) B) and D)

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Figure 9-4. The figure shows a utility function for Dexter. Figure 9-4. The figure shows a utility function for Dexter. -Refer to Figure 9-4. Suppose Dexter begins with $1,300 in wealth. Starting from there, A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. D) This cannot be determined from the graph. -Refer to Figure 9-4. Suppose Dexter begins with $1,300 in wealth. Starting from there,


A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D) This cannot be determined from the graph.

E) A) and B)
F) A) and C)

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If a person is risk averse, then she has


A) diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
B) diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.
C) increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
D) increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

E) A) and B)
F) A) and C)

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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?


A) $1,160.00
B) $1,166.40
C) $1,168.65
D) $1,169.64

E) A) and D)
F) B) and D)

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When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?


A) 5 years
B) 6 years
C) 7 years
D) 8 years

E) B) and D)
F) A) and B)

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Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 6 percent, then you would prefer to take the $X today if and only if


A) X > 1,055.56.
B) X > 1,120.89.
C) X > 1,213.33.
D) X > 1,338.26.

E) B) and C)
F) None of the above

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


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) B) and C)
F) None of the above

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Historically, stocks have offered higher rates of return than bonds.

A) True
B) False

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Discounting refers directly to


A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) calculations that ignore the phenomenon of compounding for the sake of ease and simplicity.
D) decreases in interest rates over time, while compounding refers to increases in interest rates over time.

E) A) and B)
F) None of the above

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Which of the following is a source of market risk?


A) Holding stocks in many companies carries the risk of a reduced average return.
B) Real GDP varies over time and sales and profits move with real GDP.
C) When a paper producer has declining sales, it is likely that so will other paper producers.
D) If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market.

E) A) and D)
F) A) and C)

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As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

A) True
B) False

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Figure 9-1. The figure shows a utility function. Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there, A) she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was heads or losing $200 if the result was tails. B) the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth. C) the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth. D) the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth. -Refer to Figure 9-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,


A) she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails."
B) the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth.
C) the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth.
D) the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.

E) All of the above
F) C) and D)

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The utility function of a risk-averse person has a


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)

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Studies find that mutual fund managers who do well in one year are likely to do well the next year.

A) True
B) False

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Which of the following is not consistent with the efficient market hypothesis?


A) Stock prices should follow a random walk.
B) Index funds should typically outperform highly managed funds.
C) News has no effect on stock prices.
D) There is little point in spending many hours studying the business pages looking for undervalued stocks.

E) A) and B)
F) B) and D)

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Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than


A) $8,225.06.
B) $7,920.94.
C) $7,672.58.
D) $6,998.98.

E) A) and D)
F) B) and D)

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