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A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?


A) 4 percent
B) 6 percent
C) 9 percent
D) 11 percent

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

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

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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?

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Approximat...

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Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?


A) 6 percent
B) 7 percent
C) 8 percent
D) 10 percent

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

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An asset market is said to experience a speculative bubble when


A) the price of the asset rises above what appears to be its fundamental value.
B) the price of the asset appears to follow a random walk.
C) the market cannot establish an equilibrium price for the asset.
D) the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.

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

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If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?


A) $320.69
B) $324.00
C) $324.73
D) $327.81

E) All of the above
F) A) and B)

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Suppose the interest rate is 7 percent. Consider four payment options: Option

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A: $500 today.
Option B: $550 one year f...

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The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

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Using the Rule of 70...

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If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

A) True
B) False

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Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

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With a 7% interest rate the rule of 70 i...

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Ronaldo's Foods considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?


A) Interest rates rise and the cost of building the store rises.
B) Interest rates rise and the cost of building the store falls.
C) Interest rates fall and the cost of building the store rises.
D) Interest rates fall and the cost of building the store falls.

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

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A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

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With a 9% interest rate, the present val...

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At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?


A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

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

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

A) True
B) False

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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 would use on your own car.


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) A) and B)

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Describe the shape of the utility function of a risk averse person.

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Its slope ...

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After the 1982 recession, the U.S. and world economies entered into a long period


A) of high unemployment rates.
B) high inflation rates.
C) that has become known as the "Great Moderation."
D) that has become known as the "Great Recession."

E) A) and B)
F) All of the above

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The idea of insurance


A) would not appeal to a risk-averse person.
B) is, other things the same, to reduce the probability of a fire, accident, or death.
C) is to share risk.
D) is to provide a sure thing, not a gamble.

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

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The field of finance primarily studies


A) how society manages its scarce resources.
B) the implications of time and risk for allocating resources over time.
C) firms' decisions concerning how much to produce and what price to charge.
D) how society can reduce market risk.

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

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Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

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$1,600/$50 = 32. The rule of 70 says tha...

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