Question 1

Writing in the Wall Street Journal in 2009,economist Jeremy Siegel argued that,in the years leading up to the financial crisis of 2008-2009,

Accepted Answer

A)   financial firms acted in too risky a fashion.
B)   the Federal Reserves's efforts to rein in the risky behavior of certain financial firms were inadequate.
C)   falling house prices "crashed the banks and the economy."
D)   All of the above are correct.E) B) and C)
F) A) and B)

Question 2

Figure 14-1.The figure shows a utility function. 
-Refer to Figure 14-1.Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A)   the distance between the origin and point B
B)   the distance between the origin and point C
C)   the distance between point A and point C
D)   the distance between point B and point CE) All of the above
F) C) and D)

Question 3

If unexpected news raised people's expectations of a corporation's future dividends and price,then before the price changes this corporation's stock would be

Accepted Answer

A)   overvalued,so its price would rise.
B)   overvalued,so its price would fall.
C)   undervalued,so its price would rise.
D)   undervalued,so its price would fall.E) B) and C)
F) A) and D)

Question 4

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct what is the current interest rate?

Accepted Answer

A)   6 percent
B)   7 percent
C)   8 percent
D)   9 percentE) None of the above
F) A) and B)

Question 5

For a risk averse person,

Accepted Answer

A)   the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet.
B)   the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
C)   the utility function exhibits the property of increasing marginal utility.
D)   the utility function gets steeper as wealth increases.E) A) and C)
F) All of the above

Question 6

According to the rule of 70,if the interest rate is 10 percent,about how long will it take for the value of a savings account to double?

Accepted Answer

A)   about 6.3 years
B)   about 7 years
C)   about 7.7 years
D)   about 10 yearsE) None of the above
F) B) and C)

Question 7

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Accepted Answer

A) True 
 B)False

Question 8

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: receive $2,000 five years from now.The interest rate is 15 percent.Rank these three options from highest present value to lowest present value.

Accepted Answer

A)   Option 1;Option 2;Option 3
B)   Option 3;Option 2;Option 1
C)   Option 2;Option 3;Option 1
D)   Option 3;Option 1;Option 2E) None of the above
F) All of the above

Question 9

The future value of $500 saved for two years at an interest rate of 5% is

Accepted Answer

A)   $550.25.
B)   $550.00.
C)   $551.25.
D)   None of the above are correct.E) A) and B)
F) B) and C)

Question 10

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty.He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher.How much,to the nearest penny,does the riskier bond pay in two years?

Accepted Answer

A)   $1,160.00
B)   $1,166.40
C)   $1,168.65
D)   $1,169.64E) C) and D)
F) A) and C)

Question 11

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years.What is the highest interest rate at which Halvorson would find this project profitable?

Accepted Answer

A)   7%
B)   6%
C)   5%
D)   It is not profitable at any of these interest rates.E) B) and C)
F) None of the above

Question 12

Which of the following is a source of market risk?

Accepted Answer

A)   Holding stocks in many companies carries the risk of a reduced average return.
B)   Real GDP varies over time and sales and profits move with real GDP.
C)   When a paper producer has declining sales,it is likely that so will other paper producers.
D)   If stockholders become aggravated with the way a CEO runs a company,the price of that company's stock might fall in the stock market.E) A) and B)
F) None of the above

Question 13

Can insurance be thought of as diversification? Defend your answer.

Accepted Answer

Yes.It replaces a la...

Question 14

Bert put $75 into an account and one year later had $100.What interest rate was paid on Bert's deposit?

Accepted Answer

A)   20 percent
B)   25 percent
C)   28 percent
D)   None of the above is correct.E) A) and D)
F) A) and C)

Question 15

Other things the same,as the number of stocks in a portfolio rises,

Accepted Answer

A)   risk increases and the standard deviation of the return rises.
B)   risk increases and the standard deviation of the return falls.
C)   risk decreases and the standard deviation of the return rises.
D)   risk decreases and the standard deviation of the return falls.E) B) and C)
F) A) and D)

Question 16

Samantha holds stocks in four companies.If she adds stocks of several more companies she will decrease

Accepted Answer

A)   firm specific risk and market risk.
B)   firm specific risk but not market risk.
C)   market risk but not firm specific risk.
D)   neither firm specific nor market risk.E) A) and D)
F) None of the above

Question 17

Figure 14-1.The figure shows a utility function. 
-Refer to Figure 14-1.The utility function that is shown exhibits the property of diminishing

Accepted Answer

A)   wealth.
B)   utility.
C)   marginal wealth.
D)   marginal utility.E) B) and C)
F) All of the above

Question 18

If you deposit $900 into an account for two years and the interest rate is 4%,how much do you have at the end of the two years?

Accepted Answer

A)   $972.00
B)   $973.44
C)   $974.19
D)   None of the above is correct.E) A) and B)
F) None of the above

Question 19

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A)   Stock prices should follow a random walk.
B)   Index funds should typically outperform highly managed funds.
C)   News has no effect on stock prices.
D)   There is little point in spending many hours studying the business pages looking for undervalued stocks.E) None of the above
F) All of the above

Question 20

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

Accepted Answer

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

Exam 27: The Basic Tools of Finance

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty.He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher.How much,to the nearest penny,does the riskier bond pay in two years?

Correct AnswerverifiedShow Answer

Bert put $75 into an account and one year later had $100.What interest rate was paid on Bert's deposit?

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct what is the current interest rate?

Correct AnswerverifiedShow Answer

Which of the following is not consistent with the efficient market hypothesis?

Correct AnswerverifiedShow Answer

Samantha holds stocks in four companies.If she adds stocks of several more companies she will decrease

Correct AnswerverifiedShow Answer

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: receive $2,000 five years from now.The interest rate is 15 percent.Rank these three options from highest present value to lowest present value.

Correct AnswerverifiedShow Answer

Figure 14-1.The figure shows a utility function. -Refer to Figure 14-1.The utility function that is shown exhibits the property of diminishing

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Correct AnswerverifiedShow Answer

Can insurance be thought of as diversification? Defend your answer.

Correct AnswerverifiedYes.It replaces a la...View AnswerShow Answer

If you deposit $900 into an account for two years and the interest rate is 4%,how much do you have at the end of the two years?

Correct AnswerverifiedShow Answer

Figure 14-1.The figure shows a utility function. -Refer to Figure 14-1.Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Correct AnswerverifiedShow Answer

For a risk averse person,

Correct AnswerverifiedShow Answer

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years.What is the highest interest rate at which Halvorson would find this project profitable?

Correct AnswerverifiedShow Answer

The future value of $500 saved for two years at an interest rate of 5% is

Correct AnswerverifiedShow Answer

Writing in the Wall Street Journal in 2009,economist Jeremy Siegel argued that,in the years leading up to the financial crisis of 2008-2009,

Correct AnswerverifiedShow Answer

Other things the same,as the number of stocks in a portfolio rises,

Correct AnswerverifiedShow Answer

According to the rule of 70,if the interest rate is 10 percent,about how long will it take for the value of a savings account to double?

Correct AnswerverifiedShow Answer

If unexpected news raised people's expectations of a corporation's future dividends and price,then before the price changes this corporation's stock would be

Correct AnswerverifiedShow Answer

Which of the following is a source of market risk?

Correct AnswerverifiedShow Answer

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Yes.It replaces a la...
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