Question 1

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

Accepted Answer

A)   the first one
B)   the second one
C)   the third one
D)   They all have the same balance.E) A) and D)
F) A) and C)

Question 2

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

Question 3

Which, if any, of the present values below are correctly computed?

Accepted Answer

A)   A payment of $1,000 to be received one year from today, with a 8 percent interest rate, has a present value of $945.45.
B)   A payment of $1,000 to be received one year from today, with a 9 percent interest rate, has a present value of $911.11.
C)   A payment of $1,000 to be received one year from today, with a 10 percent interest rate, has a present value of $905.06.
D)   None of the above are correct to the nearest cent.E) A) and D)
F) A) and C)

Question 4

Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?

Accepted Answer

A)   5%
B)   10%
C)   15%
D)   20%E) B) and C)
F) None of the above

Question 5

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Accepted Answer

A) True 
 B)False

Question 6

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Accepted Answer

Buying stocks in a n...

Question 7

One way to characterize the difference between compounding and discounting is to say that

Accepted Answer

A)   compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption.
B)   discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption.
C)   the process of compounding produces a future value, whereas the process of discounting produces a present value.
D)   the process of compounding produces a present value, whereas the process of discounting produces a future value.E) A) and B)
F) B) and D)

Question 8

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Accepted Answer

A)   $66,225.25
B)   $67,556.42
C)   $68,058.32
D)   $71,428.57E) B) and C)
F) C) and D)

Question 9

Suppose the interest rate is 5 percent. Consider three payment options: 
1)  $500 today.
2)  $520 one year from today.
3)  $550 two years from today.
Which of the following is correct?

Accepted Answer

A)   1 has the lowest present value and 3 has the highest. 
B)   2 has the lowest present value and 1 has the highest.
C)   3 has the lowest present value and 2 has the highest.
D)   None of the above is correct.E) All of the above
F) A) and C)

Question 10

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 11

You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.

Accepted Answer

A)   8 percent, $15,000
B)   7 percent, $16,000
C)   6 percent, $17,000
D)   All of the above are correct.E) None of the above
F) All of the above

Question 12

Laura says that the present value of $700 to be received one year from today if the interest rate is 6 percent is less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Cassie says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

Accepted Answer

A)   Both Laura and Cassie are correct.
B)   Both Laura and Cassie are incorrect.
C)   Only Laura is correct.
D)   Only Cassie is correct.E) B) and D)
F) B) and C)

Question 13

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Accepted Answer

A)   no less than 4.53 percent.
B)   no greater than 4.53 percent.
C)   no less than 5.81 percent.
D)   no greater than 5.81 percent.E) B) and C)
F) C) and D)

Question 14

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 701 - 1/X)  years.
C)   doubles every 70/X2 years.
D)   doubles every 70/1 - X)  years.E) A) and C)
F) A) and B)

Question 15

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

Accepted Answer

A)   the interest rate is to make sure that the price of bonds increases over time.
B)   diversification is to eliminate market risk.
C)   insurance is to reduce the risks inherent in life.
D)   insurance is to spread risks around more efficiently.E) A) and B)
F) A) and C)

Question 16

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Accepted Answer

A)   raise the price of the company's stock.
B)   not affect the price of the company's stock.
C)   reduce the price of the company's stock.
D)   More information is needed to answer the question.E) All of the above
F) A) and C)

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) None of the above
F) A) and D)

Question 18

Scenario 27-1
Lisa has a utility function  where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Accepted Answer

Yes, Lisa is risk averse. The ...

Question 19

Marcia has four savings accounts. Which account has the largest balance?

Accepted Answer

A)   $100 deposited 1 year ago at an 8 percent interest rate
B)   $100 deposited 2 years ago at a 4 percent interest rate
C)   $100 deposited 4 years ago at a 2 percent interest rate
D)   $100 deposited 8 years ago at a 1 percent interest rateE) All of the above
F) B) and D)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 19: The Basic Tools of Finance

Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?

Correct Answer
verified

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Correct Answer
verified
Buying stocks in a n...
View Answer

You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.

Correct Answer
verified

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

Correct Answer
verified

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Correct Answer
verified

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Correct Answer
verified

Suppose the interest rate is 5 percent. Consider three payment options: 1) $500 today. 2) $520 one year from today. 3) $550 two years from today. Which of the following is correct?

Correct Answer
verified

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Correct Answer
verified

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Correct Answer
verified

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

Correct Answer
verified

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Correct Answer
verified

The financial system

Correct Answer
verified

One way to characterize the difference between compounding and discounting is to say that

Correct Answer
verified

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

Which, if any, of the present values below are correctly computed?

Correct Answer
verified

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

Correct Answer
verified

Marcia has four savings accounts. Which account has the largest balance?

Correct Answer
verified

Correct Answer
verified

Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Correct Answer
verified
Yes, Lisa is risk averse. The ...
View Answer

Exam 19: The Basic Tools of Finance

Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?

Correct AnswerverifiedShow Answer

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Correct AnswerverifiedBuying stocks in a n...View AnswerShow Answer

You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Correct AnswerverifiedShow Answer

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Correct AnswerverifiedShow Answer

Suppose the interest rate is 5 percent. Consider three payment options: 1) $500 today. 2) $520 one year from today. 3) $550 two years from today. Which of the following is correct?

Correct AnswerverifiedShow Answer

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Correct AnswerverifiedShow Answer

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Correct AnswerverifiedShow Answer

The financial system

Correct AnswerverifiedShow Answer

One way to characterize the difference between compounding and discounting is to say that

Correct AnswerverifiedShow Answer

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

Which, if any, of the present values below are correctly computed?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Marcia has four savings accounts. Which account has the largest balance?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Correct AnswerverifiedYes, Lisa is risk averse. The ...View AnswerShow Answer

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Buying stocks in a n...
View Answer

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Correct Answer
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Correct Answer
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Yes, Lisa is risk averse. The ...
View Answer