Question 1

If Alan is risk-averse, then he will always

Accepted Answer

A)   choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5.
B)   choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5.
C)   choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5.
D)   All of the above are correct.E) None of the above
F) A) and B)

Question 2

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Accepted Answer

A) True 
 B)False

Question 3

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following best illustrates moral hazard?

Accepted Answer

A)   After a person obtains life insurance, she takes up skydiving.
B)   A person obtains insurance knowing he is in poor health.
C)   A person holds stock only in very risky corporations.
D)   A person holds stocks from only a few corporations.E) All of the above
F) C) and D)

Question 5

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A)   4 percent.
B)   6 percent.
C)   8 percent.
D)   All of the above are correct.E) B) and D)
F) B) and C)

Question 6

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Accepted Answer

A)   market risk.
B)   moral hazard.
C)   adverse selection.
D)   risk aversion.E) A) and C)
F) B) and C)

Question 7

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Accepted Answer

Yes, according to the efficient markets ...

Question 8

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Accepted Answer

A)   He has reduced firm-specific risk but not market risk.
B)   He has reduced market risk, but not firm-specific risk.
C)   He had reduce both firm-specific risk and market risk.
D)   He has reduced neither firm-specific risk nor market risk.E) None of the above
F) A) and B)

Question 9

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

Accepted Answer

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

Question 10

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

Accepted Answer

A)   8 years
B)   10 years
C)   12 years
D)   14 yearsE) A) and B)
F) B) and C)

Question 11

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

Accepted Answer

A)   $1,133.31
B)   $1,120.00
C)   $1,123.50
D)   None of the above are correct to the nearest cent.E) B) and C)
F) All of the above

Question 12

What is the future value of $800 one year from today if the interest rate is 7 percent?

Accepted Answer

A)   $747.66
B)   $756.00
C)   $856.00
D)   None of the above are correct to the nearest cent.E) A) and B)
F) None of the above

Question 13

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Accepted Answer

A)   $4,531.52
B)   $4,878.52
C)   $5,124.50
D)   $5,516.91E) A) and D)
F) None of the above

Question 14

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) All of the above
F) B) and C)

Question 15

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Accepted Answer

A)   market risk by more than an increase from 1 to 10.
B)   market risk by less than an increase from 1 to 10.
C)   firm-specific risk by more than an increase from 1 to 10.
D)   firm-specific risk by less than an increase from 1 to 10.E) A) and D)
F) A) and C)

Question 16

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A)   "random walk"
B)   "random bubble"
C)   "speculative bubble"
D)   "speculative hedge"E) A) and B)
F) A) and C)

Question 17

Which of the following best illustrates diversification?

Accepted Answer

A)   A company that produces many different products decides to produce fewer.
B)   After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated.
C)   Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services.
D)   A person decides to purchase only stocks that have paid high dividends in the past.E) A) and D)
F) B) and D)

Question 18

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Accepted Answer

A)   4.5 percent
B)   5.4 percent
C)   6.2 percent
D)   8.0 percentE) None of the above
F) B) and D)

Question 19

Braden says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest. Lefty says that the present value of $400 to be received one year from today if the interest rate is 4 percent exceeds the present value of $400 to be received two years from today if the interest rate is 2 percent.

Accepted Answer

A)   Braden and Lefty are both correct.
B)   Braden and Lefty are both incorrect.
C)   Only Braden is correct.
D)   Only Lefty is correct.E) B) and D)
F) B) and C)

Question 20

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A)   5
B)   6
C)   8
D)   9E) C) and D)
F) All of the above

Exam 9: The Basic Tools of Finance

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Correct Answer
verified

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

Correct Answer
verified

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Correct Answer
verified

If Alan is risk-averse, then he will always

Correct Answer
verified

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

Correct Answer
verified

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Correct Answer
verified

What is the future value of $800 one year from today if the interest rate is 7 percent?

Correct Answer
verified

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Correct Answer
verified

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Correct Answer
verified

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Correct Answer
verified
Yes, according to the efficient markets ...
View Answer

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Correct Answer
verified

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

Correct Answer
verified

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Correct Answer
verified

Which of the following best illustrates moral hazard?

Correct Answer
verified

Which of the following best illustrates diversification?

Correct Answer
verified

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Correct Answer
verified

Correct Answer
verified

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct Answer
verified

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Correct Answer
verified

Exam 9: The Basic Tools of Finance

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Correct AnswerverifiedShow Answer

If Alan is risk-averse, then he will always

Correct AnswerverifiedShow Answer

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

Correct AnswerverifiedShow Answer

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Correct AnswerverifiedShow Answer

What is the future value of $800 one year from today if the interest rate is 7 percent?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Correct AnswerverifiedShow Answer

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Correct AnswerverifiedShow Answer

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Correct AnswerverifiedYes, according to the efficient markets ...View AnswerShow Answer

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Correct AnswerverifiedShow Answer

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

Correct AnswerverifiedShow Answer

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Correct AnswerverifiedShow Answer

Which of the following best illustrates moral hazard?

Correct AnswerverifiedShow Answer

Which of the following best illustrates diversification?

Correct AnswerverifiedShow Answer

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct AnswerverifiedShow Answer

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Correct AnswerverifiedShow Answer

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verified
Yes, according to the efficient markets ...
View Answer

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Correct Answer
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Correct Answer
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Correct Answer
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