Question 1

Jarrod says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest. Simon says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent.

Accepted Answer

A)   Jarrod and Simon are both correct.
B)   Jarrod and Simon are both incorrect.
C)   Only Jarrod is correct.
D)   Only Simon is correct.E) B) and D)
F) B) and C)

Question 2

An index fund

Accepted Answer

A)   holds only stocks and bonds that are indexed to inflation.
B)   holds all the stocks in a given stock index.
C)   guarantees a return that follows the index of leading economic indicators.
D)   typically has a lower return than a managed fund.E) A) and C)
F) None of the above

Question 3

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

Question 4

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Accepted Answer

A)   have no effect on its stock price.
B)   raise the price of the stock.
C)   lower the price of the stock.
D)   change the price of the stock in a random direction.E) A) and B)
F) A) and C)

Question 5

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?

Accepted Answer

The present value of the futur...

Question 6

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 7

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Accepted Answer

A)   $12,579.84
B)   $12,596.80
C)   $12,597.12
D)   None of the above are correct to the nearest cent.E) None of the above
F) A) and B)

Question 8

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

Accepted Answer

A)   Dexter is risk averse.
B)   Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)   the property of diminishing marginal utility does not apply to Dexter.
D)   All of the above are correct.E) A) and C)
F) All of the above

Question 9

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

Accepted Answer

A)   raised both firm-specific risk and market risk.
B)   raised firm-specific risk, but not market risk.
C)   raised market risk, but not firm-specific risk.
D)   None of the above is correct.E) A) and C)
F) B) and C)

Question 10

Marcia has four savings accounts. Which account has the largest balance?

Accepted Answer

A)   $100 deposited 1 year ago at an 8 percent interest rate
B)   $100 deposited 2 years ago at a 4 percent interest rate
C)   $100 deposited 4 years ago at a 2 percent interest rate
D)   $100 deposited 8 years ago at a 1 percent interest rateE) All of the above
F) B) and C)

Question 11

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) C) and D)

Question 12

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Accepted Answer

A) True 
 B)False

Question 13

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Accepted Answer

A)   2 percent
B)   4 percent
C)   6 percent
D)   8 percentE) B) and C)
F) A) and B)

Question 14

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Accepted Answer

A)   firm­specific risk, which will likely raise shareholders' demand for higher return.
B)   firm­specific risk, which will likely not likely raise shareholders' demand for higher return.
C)   market risk, which will likely raise shareholders' demand for higher return.
D)   market risk, which will likely not raise shareholders' demand for higher return.E) None of the above
F) B) and D)

Question 15

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth but is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth but is not risk averse.E) C) and D)
F) A) and C)

Question 16

Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?

Accepted Answer

A)   5%
B)   10%
C)   15%
D)   20%E) All of the above
F) C) and D)

Question 17

Diversification

Accepted Answer

A)   increases the likely fluctuation in a portfolio's return, but reduces market risk.
B)   increases the likely fluctuation in a portfolio's return, but reduces firm­specific risk..
C)   reduces the likely fluctuation in a portfolio's return and reduces market risk.
D)   reduces the likely fluctuation in a portfolio's return and reduces firm­specific risk.E) A) and B)
F) None of the above

Question 18

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

Question 19

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

Using the Rule of 70...

Exam 14: The Basic Tools of Finance

The performance of index funds

Correct Answer
verified

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?

Correct Answer
verified
The present value of the futur...
View Answer

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

Correct Answer
verified

Which of the following is adverse selection?

Correct Answer
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Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?

Correct Answer
verified

An index fund

Correct Answer
verified

Diversification

Correct Answer
verified

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Correct Answer
verified

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Correct Answer
verified

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?

Correct Answer
verified
Using the Rule of 70...
View 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 Answer
verified

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Correct Answer
verified

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

Correct Answer
verified

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Correct Answer
verified

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Correct Answer
verified

Correct Answer
verified

Marcia has four savings accounts. Which account has the largest balance?

Correct Answer
verified

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

Correct Answer
verified

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Correct Answer
verified

Exam 14: The Basic Tools of Finance

The performance of index funds

Correct AnswerverifiedShow Answer

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?

Correct AnswerverifiedThe present value of the futur...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is adverse selection?

Correct AnswerverifiedShow Answer

Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?

Correct AnswerverifiedShow Answer

An index fund

Correct AnswerverifiedShow Answer

Diversification

Correct AnswerverifiedShow Answer

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedUsing the Rule of 70...View AnswerShow 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

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Correct AnswerverifiedShow Answer

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Marcia has four savings accounts. Which account has the largest balance?

Correct AnswerverifiedShow Answer

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

Correct AnswerverifiedShow Answer

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
The present value of the futur...
View Answer

Correct Answer
verified

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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Using the Rule of 70...
View Answer

Correct Answer
verified

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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