Question 1

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

Accepted Answer

A)   to entice risk-loving people to become risk averse.
B)   to promote the phenomenon of adverse selection.
C)   not to eliminate the risks inherent in life,but to spread them around more efficiently.
D)   not to spread risks,but to eliminate them for individual policy holders.E) B) and D)
F) All of the above

Question 2

Albert Einstein once referred to compounding as

Accepted Answer

A)   "an obsession among economists that defies explanation."
B)   "the greatest mathematical discovery of all time."
C)   his own discovery.
D)   John Maynard Keynes's greatest contribution.E) B) and C)
F) A) and C)

Question 3

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Accepted Answer

A)   $2,000(1.06) 
B)   $1,000 + $(1.06) 2
C)   $1,000(1.06) 2
D)   None of the above are correct.E) None of the above
F) A) and B)

Question 4

Economists have developed models of risk aversion using the concept of

Accepted Answer

A)   utility and the associated assumption of diminishing marginal utility.
B)   utility and the associated assumption of increasing marginal utility.
C)   income and the associated assumption of diminishing marginal wealth.
D)   income and the associated assumption of increasing marginal wealth.E) A) and D)
F) B) and C)

Question 5

In answering which of the following questions would you find it necessary to calculate a present value?

Accepted Answer

A)   Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest?
B)   Should ABC Corporation buy a factory today for $2 million,knowing that the factory will yield the corporation $3 million after 5 years?
C)   If Jill puts $5,000 today into a bank account that pays 3 percent interest,then how much will she have in the account after 2 years?
D)   You would find it necessary to calculate a present value in order to answer all of these questions.E) A) and D)
F) None of the above

Question 6

After much anticipation a company releases a new smartphone.The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting.The unexpectedly negative reaction to the smartphone would

Accepted Answer

A)   raise the present value and the price of the corporation's stock.
B)   raise the present value and reduce the price of the corporation's stock.
C)   reduce the present value and the price of the corporation's stock.
D)   reduce the present value and raise the price of the corporation's stock.E) A) and D)
F) A) and C)

Question 7

In the 1990s,several stocks had very,very high price to earnings ratios.These stocks appeared overvalued to many observers.What might the people who bought them have been thinking?

Accepted Answer

There are several possibilities.The firs...

Question 8

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   7 percentE) A) and D)
F) None of the above

Question 9

What is meant by an asset bubble?

Accepted Answer

The price of an asse...

Question 10

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Accepted Answer

A)   doubles every 70/X years.
B)   doubles every 70(1 - 1/X) years.
C)   doubles every 70/X2 years.
D)   doubles every 70/(1 - X) years.E) C) and D)
F) B) and C)

Question 11

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

Accepted Answer

A)   3 years
B)   3.5 years
C)   4 years
D)   4.5 yearsE) C) and D)
F) A) and C)

Question 12

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

Question 13

The idea of insurance

Accepted Answer

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

Question 14

Which of the following changes would increase the present value of a future payment?

Accepted Answer

A)   a decrease in the size of the payment
B)   a decrease in the time until the payment is made
C)   an increase in the interest rate
D)   All of the above are correct.E) B) and C)
F) C) and D)

Question 15

You have been promised a payment of $400 in the future.In which of the following cases is the present value of this payment the lowest?

Accepted Answer

A)   You receive the payment 4 years from now and the interest rate is 4 percent.
B)   You receive the payment 4 years from now and the interest rate is 5 percent.
C)   You receive the payment 5 years from now and the interest rate is 4 percent.
D)   You receive the payment 5 years from now and the interest rate is 5 percent.E) C) and D)
F) None of the above

Question 16

You have been promised a payment of $100,000 in the future.In which case is the present value of this future payment highest?

Accepted Answer

A)   You receive the payment 2 years from now and the interest rate is 6 percent.
B)   You receive the payment 2 years from now and the interest rate is 4 percent.
C)   You receive the payment 3 years from now and the interest rate is 6 percent.
D)   You receive the payment 3 years from now and the interest rate is 4 percent.E) None of the above
F) A) and B)

Question 17

The financial system

Accepted Answer

A)   involves bank accounts,mortgages,stock prices,and many other items.
B)   involves decisions and actions undertaken by people at a point in time that affect their lives in the future.
C)   coordinates the economy's saving and investment.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 18

Mary Beth is risk averse and has $1,000 with which to make a financial investment.She 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.Mary Beth should choose

Accepted Answer

A)   option A.
B)   option B.
C)   option C.
D)   either A or B because they are the same to her.E) B) and D)
F) All of the above

Question 19

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

Question 20

Two years ago Lenny put some money into an account.He earned 6 percent interest on this account and now he has about $1,000.About how much did Lenny deposit into his account two years ago?

Accepted Answer

A)   about $860
B)   about $870
C)   about $880
D)   about $890E) B) and D)
F) A) and C)

Exam 27: The Basic Tools of Finance

Which of the following changes would increase the present value of a future payment?

Correct Answer
verified

What is meant by an asset bubble?

Correct Answer
verified
The price of an asse...
View Answer

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Correct Answer
verified

You have been promised a payment of $100,000 in the future.In which case is the present value of this future payment highest?

Correct Answer
verified

The financial system

Correct Answer
verified

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Correct Answer
verified

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

Correct Answer
verified

The idea of insurance

Correct Answer
verified

Two years ago Lenny put some money into an account.He earned 6 percent interest on this account and now he has about $1,000.About how much did Lenny deposit into his account two years ago?

Correct Answer
verified

Economists have developed models of risk aversion using the concept of

Correct Answer
verified

In the 1990s,several stocks had very,very high price to earnings ratios.These stocks appeared overvalued to many observers.What might the people who bought them have been thinking?

Correct Answer
verified
There are several possibilities.The firs...
View Answer

After much anticipation a company releases a new smartphone.The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting.The unexpectedly negative reaction to the smartphone would

Correct Answer
verified

You have been promised a payment of $400 in the future.In which of the following cases is the present value of this payment the lowest?

Correct Answer
verified

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

Correct Answer
verified

In answering which of the following questions would you find it necessary to calculate a present value?

Correct Answer
verified

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

Correct Answer
verified

Correct Answer
verified

Albert Einstein once referred to compounding as

Correct Answer
verified

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

Correct Answer
verified

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Correct Answer
verified

Exam 27: The Basic Tools of Finance

Which of the following changes would increase the present value of a future payment?

Correct AnswerverifiedShow Answer

What is meant by an asset bubble?

Correct AnswerverifiedThe price of an asse...View AnswerShow Answer

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Correct AnswerverifiedShow Answer

You have been promised a payment of $100,000 in the future.In which case is the present value of this future payment highest?

Correct AnswerverifiedShow Answer

The financial system

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The idea of insurance

Correct AnswerverifiedShow Answer

Two years ago Lenny put some money into an account.He earned 6 percent interest on this account and now he has about $1,000.About how much did Lenny deposit into his account two years ago?

Correct AnswerverifiedShow Answer

Economists have developed models of risk aversion using the concept of

Correct AnswerverifiedShow Answer

In the 1990s,several stocks had very,very high price to earnings ratios.These stocks appeared overvalued to many observers.What might the people who bought them have been thinking?

Correct AnswerverifiedThere are several possibilities.The firs...View AnswerShow Answer

After much anticipation a company releases a new smartphone.The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting.The unexpectedly negative reaction to the smartphone would

Correct AnswerverifiedShow Answer

You have been promised a payment of $400 in the future.In which of the following cases is the present value of this payment the lowest?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In answering which of the following questions would you find it necessary to calculate a present value?

Correct AnswerverifiedShow Answer

George puts $200 into an account when the interest rate is 8 percent.Later he checks his balance and finds that he has a balance of about $272.10.How many years did he wait to check his balance?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Albert Einstein once referred to compounding as

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
The price of an asse...
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
verified
There are several possibilities.The firs...
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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