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The present value of a payment to be made in the future falls as


A) the interest rate rises and the time until the payment is made increases.
B) the interest rate rises and the time until the payment is made decreases.
C) the interest rate falls and the time until the payment is made increases.
D) the interest rate falls and the time until the payment is made decreases.

E) None of the above
F) All of the above

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A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks


A) has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk.
B) almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds.
C) is spending his or her time wisely if the efficient markets hypothesis is correct.
D) is interested in the likely ability of a corporation to pay dividends in the future.

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

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You are better off choosing $400 in 4 years rather than $300 today if the interest rate is


A) lower than about 5.5 percent.
B) higher than about 5.5 percent.
C) lower than about 7.5 percent.
D) higher than about 7.5 percent.

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

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

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Figure 27-1. The figure shows a utility function. Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including A) the risk-return tradeoff. B) insurance. C) diversification. D) All of the above are correct. -Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including


A) the risk-return tradeoff.
B) insurance.
C) diversification.
D) All of the above are correct.

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

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Write the formula to find the present value of $x to be paid in n years.

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Figure 27-3 The following figure shows the utility function for Paul. Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose the vertical distance between the points 0, A) and 0, B) is 10. If his wealth increased from $700 to $900, then A) Paul's utility would increase by less than 10 units. B) Paul's utility would increase by more than 10 units. C) Paul's utility would increase by exactly 10 units. D) Any of the above could be correct. -Refer to Figure 27-3. Suppose the vertical distance between the points 0, A) and 0, B) is 10. If his wealth increased from $700 to $900, then


A) Paul's utility would increase by less than 10 units.
B) Paul's utility would increase by more than 10 units.
C) Paul's utility would increase by exactly 10 units.
D) Any of the above could be correct.

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

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If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

A) True
B) False

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If a savings account pays 3.5% 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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A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?


A) 7 percent
B) 8 percent
C) 9 percent
D) 10 percent

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

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Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?


A) $3,180.00
B) $3,182.70
C) $3,183.62
D) None of the above are correct to the nearest cent.

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

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In the 1990s, Fed Chairperson Alan Greenspan questioned whether the stock market


A) boom at that time reflected "irrational exuberance."
B) decline at that time reflected "irrational funk."
C) boom at that time reflected "rational exuberance."
D) decline at that time reflected "rational funk."

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

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Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?


A) 5 percent
B) 7 percent
C) 10 percent
D) 14 percent

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

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Cash payments that companies make to shareholders are called


A) annuities.
B) dividends.
C) premiums.
D) favorables.

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

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You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.


A) 8 percent, $15,000
B) 7 percent, $16,000
C) 6 percent, $17,000
D) All of the above are correct.

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

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Greg's Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first year, $4 million the second year and have no value thereafter. Greg's Tasty Ice Cream should build the factory if the interest rate is


A) 3% but not if it is 4%.
B) 4% but not if it is 5%.
C) 5% but not if it is 6%.
D) 6% but not if it is 7%.

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

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David's Utility Function David's Utility Function If David's current wealth is $61,000, then A) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk averse. B) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not risk averse. C) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is risk averse. D) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is not risk averse. If David's current wealth is $61,000, then


A) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk averse.
B) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not risk averse.
C) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is risk averse.
D) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is not risk averse.

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

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Figure 27-4. The figure shows a utility function for Alex. Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. C) Alex is risk averse. D) Alex is not risk averse. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that


A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable.
B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk.
C) Alex is risk averse.
D) Alex is not risk averse.

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

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Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent.


A) Both Vince and Terri are correct.
B) Only Vince is correct.
C) Only Terri is correct.
D) Neither Vince nor Terri is correct.

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

Correct Answer

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A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should


A) raise the price of the corporation's stock; if it does not the stock is overvalued.
B) raise the price of the corporation's stock; if it does not the stock is undervalued.
C) reduce the price of the corporation's stock; if it does not the stock is overvalued.
D) reduce the price of the corporation's stock; if it does not the stock is undervalued.

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

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