Question 1

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Accepted Answer

A)  she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails."
B)  the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth.
C)  the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth.
D)  the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.E) C) and D)
F) B) and C)

Question 2

Risk aversion helps to explain various things we observe in the economy, including

Accepted Answer

A)  adherence to the old adage, "Don't put all your eggs in one basket."
B)  insurance.
C)  the risk-return trade-off.
D)  All of the above are correct.E) All of the above
F) A) and B)

Question 3

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Accepted Answer

A)  $3,680.00
B)  $3,712.77
C)  $3,750.00
D)  $3,772.57E) A) and B)
F) A) and D)

Question 4

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Accepted Answer

A)  deadweight loss
B)  present value
C)  economic growth
D)  financial intermediationE) A) and B)
F) A) and C)

Question 5

Susan is planning to invest in one of four stock portfolios, and her financial advisor has given her details regarding the risk associated with each portfolio. Which of the following portfolios would you expect to have the lowest average annual rate of return?

Accepted Answer

A)  ​A portfolio with a standard deviation of 3%.
B)  ​​​A portfolio with a standard deviation of 6%.
C)  ​A portfolio with a standard deviation of 9%.
D)  ​A portfolio with a standard deviation of 12%.E) A) and B)
F) A) and C)

Question 6

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

Question 7

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

Accepted Answer

A)  2%
B)  ​5%
C)  ​7%
D)  ​10%E) B) and D)
F) All of the above

Question 8

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Accepted Answer

A)  both the firm-specific risk and the market risk of his portfolio.
B)  the firm-specific risk, but not the market risk of his portfolio.
C)  the market risk, but not the firm-specific risk of his portfolio.
D)  neither the market risk nor the firm-specific risk of his portfolio.E) A) and D)
F) C) and D)

Question 9

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

Accepted Answer

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

Question 10

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A)  $500(1.05) 2 + $500/(1.05) 2
B)  $500(1.05) 2 + $500
C)  $500 + $500/(1.05) 2
D)  $500 + $500E) A) and B)
F) None of the above

Question 11

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

Accepted Answer

A)  rises. The company is more likely to buy the equipment.
B)  rises. The company is less likely to buy the equipment.
C)  falls. The company is more likely to buy the equipment.
D)  falls. The company is less likely to buy the equipment.E) A) and B)
F) B) and D)

Question 12

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.

Accepted Answer

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) All of the above
F) B) and D)

Question 13

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 B)
F) None of the above

Question 14

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

Question 15

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Accepted Answer

A)  moral hazard and market risk.
B)  moral hazard and firm specific risk.
C)  adverse selection and market risk.
D)  adverse selection and firm specific risk.E) All of the above
F) C) and D)

Question 16

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Accepted Answer

It is worth more if it is received in 5 ...

Question 17

If stock prices follow a random walk, then stock investors can make large profits by

Accepted Answer

A)  buying stocks whose prices have been falling for several days.
B)  buying stocks whose prices have been rising for several days.
C)  performing fundamental analysis of stocks using data contained in annual reports.
D)  using inside information.E) All of the above
F) A) and D)

Question 18

Scenario 27-2
Suppose Dave has a utility function  where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for  
.

Accepted Answer

Here is th...

Question 19

How does adverse selection affect the insurance market?

Accepted Answer

High risk persons ar...

Question 20

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A)  upward-sloping and has decreasing slope.
B)  upward-sloping and has increasing slope.
C)  downward-sloping and has decreasing slope.
D)  downward-sloping and has increasing slope.E) B) and D)
F) A) and B)

Exam 27: Tools of Finance

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for .

Correct AnswerverifiedHere is th...View AnswerShow Answer

If stock prices follow a random walk, then stock investors can make large profits by

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​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

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

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Correct AnswerverifiedShow Answer

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,229.70. What number of dollars, X, did you deposit?

Correct AnswerverifiedShow Answer

Diminishing marginal utility of wealth implies that the utility function is

Correct AnswerverifiedShow Answer

Risk aversion helps to explain various things we observe in the economy, including

Correct AnswerverifiedShow Answer

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

How does adverse selection affect the insurance market?

Correct AnswerverifiedHigh risk persons ar...View AnswerShow Answer

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Correct AnswerverifiedIt is worth more if it is received in 5 ...View AnswerShow Answer

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Correct AnswerverifiedShow Answer

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

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

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

Correct AnswerverifiedShow Answer

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Correct AnswerverifiedShow Answer

Susan is planning to invest in one of four stock portfolios, and her financial advisor has given her details regarding the risk associated with each portfolio. Which of the following portfolios would you expect to have the lowest average annual rate of return?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Here is th...
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Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

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High risk persons ar...
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It is worth more if it is received in 5 ...
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