Question 1

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A)   the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions.
B)   the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions.
C)   the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions.
D)   the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.E) A) and C)
F) A) and D)

Question 2

Will is risk averse and has $1,000 with which to make a financial investment. He has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Will should choose

Accepted Answer

A)   option A.
B)   option B.
C)   option C.
D)   either option A or option B because Will is indifferent between those two options and they are superior to option C.E) All of the above
F) A) and B)

Question 3

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by ...

Question 4

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

Accepted Answer

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

Question 5

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Accepted Answer

A)   no less than 4.53 percent.
B)   no greater than 4.53 percent.
C)   no less than 5.81 percent.
D)   no greater than 5.81 percent.E) A) and B)
F) None of the above

Question 6

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Accepted Answer

A)   Interest rates rise and you get the payment sooner.
B)   Interest rates rise and you have to wait longer for the payment.
C)   Interest rates fall and you get the payment sooner.
D)   Interest rates fall and you have to wait longer to get the payment.E) None of the above
F) A) and B)

Question 7

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Accepted Answer

The answer of Write the formula to find the present...

Question 8

The rule of 70 applies to a growing savings account but not to a growing economy.

Accepted Answer

A) True 
 B)False

Question 9

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Accepted Answer

A)   5 years
B)   6 years
C)   7 years
D)   8 yearsE) None of the above
F) All of the above

Question 10

Scenario 27-1
Lisa has a utility function  where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $16 million with probability P and pays $4 million with probability 1-P). Given Lisa's utility function, how high does P need to be before Lisa will prefer option B?

Accepted Answer

Lisa will prefer option B if t...

Question 11

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False

Question 12

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Accepted Answer

A)   5 percent
B)   7 percent
C)   10 percent
D)   14 percentE) B) and D)
F) All of the above

Question 13

From the standpoint of the economy as a whole, the role of

Accepted Answer

A)   the interest rate is to make sure that the price of bonds increases over time.
B)   diversification is to eliminate market risk.
C)   insurance is to reduce the risks inherent in life.
D)   insurance is to spread risks around more efficiently.E) A) and C)
F) A) and B)

Question 14

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

Accepted Answer

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

Question 15

Suppose you win a small lottery and you are given the following choice: You can 1)  receive an immediate payment of $10,000 or 2)  three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Accepted Answer

A)   2 percent, but not if the interest rate is 3 percent.
B)   3 percent, but not if the interest rate is 4 percent.
C)   4 percent, but not if the interest rate is 5 percent.
D)   5 percent, but not if the interest rate is 6 percent.E) A) and D)
F) All of the above

Question 16

If the efficient market hypothesis is correct, then

Accepted Answer

A)   index funds should typically beat managed funds, and usually do.
B)   index fund should typically beat managed funds, but usually do not.
C)   mutual funds should typically beat index funds, and usually do.
D)   mutual funds should typically beat index funds, but usually do not.E) A) and B)
F) A) and C)

Question 17

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Accepted Answer

A)   $X1 + rN) N
B)   $X1 + r) N
C)   $X1 + rN) 
D)   $X1 + r/N) NE) All of the above
F) C) and D)

Question 18

Diversification

Accepted Answer

A)   increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
B)   increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.
C)   reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
D)   reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.E) B) and C)
F) A) and B)

Question 19

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

Accepted Answer

A)   5
B)   7
C)   9
D)   11E) C) and D)
F) None of the above

Question 20

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. In what ways does the graph differ from the usual case?

Accepted Answer

A)   The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping.
B)   The utility function shown here is bowed downward convex) , whereas in the usual case the utility function is bowed upward concave) .
C)   On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis.
D)   On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.E) C) and D)
F) B) and D)

Exam 9: The Basic Tools of Finance

The future value of $1 saved today is $1/(1 + r).

Correct Answer
verified

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Correct Answer
verified

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

Correct Answer
verified

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Correct Answer
verified

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Correct Answer
verified

If the efficient market hypothesis is correct, then

Correct Answer
verified

Diversification

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Correct Answer
verified

The rule of 70 applies to a growing savings account but not to a growing economy.

Correct Answer
verified

From the standpoint of the economy as a whole, the role of

Correct Answer
verified

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. In what ways does the graph differ from the usual case?

Correct Answer
verified

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

Correct Answer
verified

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Correct Answer
verified

A bank might make mortgages to people in different regions of the country. By doing so

Correct Answer
verified

List three different ways that a risk-averse person can reduce financial risk.

Correct Answer
verified
A risk-averse person can reduce risk by ...
View Answer

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

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

Correct Answer
verified

Exam 9: The Basic Tools of Finance

The future value of $1 saved today is $1/(1 + r).

Correct AnswerverifiedShow Answer

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Correct AnswerverifiedShow Answer

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Correct AnswerverifiedShow Answer

If the efficient market hypothesis is correct, then

Correct AnswerverifiedShow Answer

Diversification

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Correct AnswerverifiedShow Answer

The rule of 70 applies to a growing savings account but not to a growing economy.

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. In what ways does the graph differ from the usual case?

Correct AnswerverifiedShow Answer

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

Correct AnswerverifiedShow Answer

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

Correct AnswerverifiedShow Answer

A bank might make mortgages to people in different regions of the country. By doing so

Correct AnswerverifiedShow Answer

List three different ways that a risk-averse person can reduce financial risk.

Correct AnswerverifiedA risk-averse person can reduce risk by ...View AnswerShow Answer

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Correct Answer
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A risk-averse person can reduce risk by ...
View Answer

Correct Answer
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Correct Answer
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Lisa will prefer option B if t...
View Answer

Correct Answer
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