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Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?


A) 2 percent
B) 4 percent
C) 6 percent
D) 8 percent

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

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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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Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's account worth today?


A) $1,225.38
B) $1,248.48
C) $1,264.72
D) $1,273.45

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

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Scenario 27-2 Suppose Dave has a utility function 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 . 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 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 . . 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 .

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Here is th...

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Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

A) True
B) False

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


A) a decrease in the size of the payment
B) an increase 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) All of the above

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Which of the following is not correct?


A) The higher average return on stocks than on bonds comes at the price of higher risk.
B) Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk.
C) Insurance markets reduce risk, but not by diversification.
D) Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.

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

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Writing in The Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis


A) was responsible for the financial crisis of 2008-2009.
B) was responsible for the Great Depression of the 1930s.
C) claims that prices observed in financial markets are always "right."
D) claims that prices observed in financial markets are mostly "wrong."

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

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Which of the following actions best illustrates adverse selection?


A) A person purposely chooses bonds of corporations with high default risk because of the high returns.
B) A person dislikes losing $400 more than he likes winning $400.
C) After obtaining automobile insurance a person drives less carefully than before.
D) A person intending to take up dangerous hobbies applies for life insurance.

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

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Discounting refers directly to


A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) calculations that ignore the phenomenon of compounding for the sake of ease and simplicity.
D) decreases in interest rates over time, while compounding refers to increases in interest rates over time.

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

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Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?


A) $302.50
B) $306.23
C) $308.67
D) $309.39

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

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There are many concerns for risk-averse lenders. Consider the following: 1. Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans. 2. Lenders are concerned that real GDP will decline leading to reduced corporate profits. 3. Lenders are concerned that products produced by certain corporations will become obsolete.


A) 1 is market risk; 2 is firm-specific risk
B) 2 is market risk; 3 is firm-specific risk
C) 3 is market risk; 1 is firm-specific risk
D) 2 is firm-specific risk; 3 is market risk

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

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Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that


A) stock prices follow a random walk.
B) the stock market is informationally efficient.
C) it is better to own stock in 20 companies than it is to own stock in 2 companies.
D) All of the above are correct.

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

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Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?


A) $12,000
B) $14,000
C) $15,500
D) $20,000

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

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Figure 27-5. The figure shows a utility function for Dexter. Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there, A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. D) This cannot be determined from the graph. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,


A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D) This cannot be determined from the graph.

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

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On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?


A) an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account
B) an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account
C) an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account
D) an interest rate of 4.5 percent, with no processing fee and no bonus

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

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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?


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

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

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A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?


A) $5001 + r) + $10,500/1 + r) 2
B) $500/1 + r) + $10,500/1 + r) 2
C) $11,000/1 + r) 2
D) $5001 + r) + $10,5001 + r) 2

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

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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


A) option A.
B) option B.
C) option C.
D) either A or B because they are the same to her.

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

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Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?


A) 2 times
B) 3 times
C) 4 times
D) 8 times

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

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