Question 1

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

Accepted Answer

A)  $8,225.06.
B)  $7,920.94.
C)  $7,672.58.
D)  $6,998.98.E) None of the above
F) A) and B)

Question 2

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

Question 3

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.​

Accepted Answer

A) True 
 B)False

Question 4

Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay

Accepted Answer

A)  $140,000, but not $150,000.
B)  $150,000, but not $160,000.
C)  $160,000, but not $170,000.
D)  $170,000, but not $180,000.E) B) and C)
F) A) and D)

Question 5

A risk-averse person has

Accepted Answer

A)  utility and marginal utility curves that slope upward.
B)  utility and marginal utility curves that slope downward.
C)  a utility curve that slopes down and a marginal utility curve that slopes upward.
D)  a utility curve that slopes upward and a marginal utility curve that slopes downward.E) B) and D)
F) None of the above

Question 6

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Accepted Answer

A)  Abraham Lincoln
B)  Thomas Edison
C)  Benjamin Franklin
D)  Albert EinsteinE) A) and D)
F) B) and C)

Question 7

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)  Britney is risk averse.
B)  Britney gains more satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars.
C)  the property of increasing marginal utility applies to Britney.
D)  All of the above are correct.E) A) and C)
F) None of the above

Question 8

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. From the appearance of the graph, we know that

Accepted Answer

A)  Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001.
B)  Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001.
C)  Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001.
D)  None of the above answers can be inferred from the appearance of the utility function.E) A) and B)
F) A) and C)

Question 9

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Accepted Answer

A) True 
 B)False

Question 10

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is

Accepted Answer

A)  $428.67.
B)  $470.00.
C)  $580.00.
D)  $583.20.E) None of the above
F) A) and B)

Question 11

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A)  3 percent.
B)  4 percent.
C)  5 percent.
D)  None of the above is correct.E) B) and D)
F) B) and C)

Question 12

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Accepted Answer

A)  and the example with Brad illustrate adverse selection.
B)  and the example with Brad illustrate moral hazard.
C)  illustrates adverse selection; the example with Brad illustrates moral hazard.
D)  illustrates moral hazard; the example with Brad illustrates adverse selection.E) A) and B)
F) A) and C)

Question 13

By holding insurance a person

Accepted Answer

A)  reduces the risk of a bad outcome, such as their house burning down.
B)  shares risk and so reduces the burden of risk.
C)  Both A and B are correct.
D)  Neither A nor B are correct.E) A) and B)
F) All of the above

Question 14

Scenario 27-2
Suppose Dave has a utility function  where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability (1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?

Accepted Answer

Dave will prefer option B if t...

Question 15

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

Approximat...

Question 16

The future value of a deposit in a savings account will be smaller

Accepted Answer

A)  the longer a person waits to withdraw the funds.
B)  the lower the interest rate is.
C)  the larger the initial deposit is.
D)  All of the above are correct.E) B) and C)
F) A) and D)

Question 17

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Accepted Answer

A)  doing research such as thoroughly reading and analyzing companies' annual reports
B)  choosing mutual funds that are managed by individuals with good reputations
C)  viewing individual stock prices as unpredictable
D)  relying upon the advice of Wall Street analystsE) A) and B)
F) B) and C)

Question 18

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

Accepted Answer

A)  2%
B)  ​5%
C)  ​7%
D)  ​10%E) None of the above
F) A) and D)

Question 19

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Accepted Answer

A)  $500/(1.06) 2
B)  $500 - 500(1.06) 2
C)  $500/(1.02) 6
D)  None of the above is correct.E) None of the above
F) C) and D)

Question 20

To diversify, a homeowner with a variable-rate mortgage should choose investments that

Accepted Answer

A)  pay higher returns when interest rates rise and lower returns when interest rates fall.
B)  pay lower returns when interest rates rise and higher returns when interest rates fall.
C)  provide a higher return than the market average.
D)  provide a lower return than the market average.E) B) and C)
F) A) and C)

Exam 27: Tools of Finance

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Correct Answer
verified

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Correct Answer
verified
Approximat...
View Answer

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct Answer
verified

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

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

To diversify, a homeowner with a variable-rate mortgage should choose investments that

Correct Answer
verified

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the graph, we know that

Correct Answer
verified

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Correct Answer
verified

The future value of a deposit in a savings account will be smaller

Correct Answer
verified

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

Correct Answer
verified

By holding insurance a person

Correct Answer
verified

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Correct Answer
verified

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

Correct Answer
verified

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.

Correct Answer
verified

A risk-averse person has

Correct Answer
verified

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Correct Answer
verified

Correct Answer
verified
Dave will prefer option B if t...
View Answer

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is

Correct Answer
verified

Correct Answer
verified

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Correct Answer
verified

Exam 27: Tools of Finance

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Correct AnswerverifiedApproximat...View AnswerShow Answer

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct AnswerverifiedShow Answer

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

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

To diversify, a homeowner with a variable-rate mortgage should choose investments that

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the graph, we know that

Correct AnswerverifiedShow Answer

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Correct AnswerverifiedShow Answer

The future value of a deposit in a savings account will be smaller

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

By holding insurance a person

Correct AnswerverifiedShow Answer

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.​

Correct AnswerverifiedShow Answer

A risk-averse person has

Correct AnswerverifiedShow Answer

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedDave will prefer option B if t...View AnswerShow Answer

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
Approximat...
View Answer

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
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Correct Answer
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Correct Answer
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Correct Answer
verified

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Dave will prefer option B if t...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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