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Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?


A) $1(1 + .05) 16
B) $1(1 + .0516) 16
C) $1(1 + .0516)
D) $1(1 + 16/.05) 16

E) None of the above
F) All of the above

Correct Answer

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

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Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?


A) $210
B) $300
C) $800
D) $1,010

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

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C

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?


A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent

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

Correct Answer

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Allen Steel Company is considering whether to build a new mill. If the interest rate rises,


A) the present value of the returns from the mill will fall, so Allen will be less likely to build the mill.
B) the present value of the returns from the mill will fall, so Allen will be more likely to build the mill.
C) the present value of the returns from the mill will rise, so Allen will be less likely to build the mill.
D) the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.

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

Correct Answer

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In which of the following instances is the present value of the future payment the largest?


A) You will receive $1,000 in 5 years and the annual interest rate is 5 percent.
B) You will receive $1,000 in 10 years and the annual interest rate is 3 percent.
C) You will receive $2,000 in 10 years and the annual interest rate is 10 percent.
D) You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

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

Correct Answer

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A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?


A) 7 percent
B) 8 percent
C) 9 percent
D) 10 percent

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

Correct Answer

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Scott Adams, creator of the comic strip Dilbert, has a theory that you should


A) buy stock in the companies you love the most.
B) buy stock in the companies you hate the most.
C) make use of technical analysis when you are deciding which stocks to buy.
D) examine companies' track records when you are deciding which stocks to buy.

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

Correct Answer

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Rosie 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. Rosie should choose


A) option A.
B) option B.
C) option C.
D) either option A or option B because Rosie is indifferent between those two options and they are superior to option C.

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

Correct Answer

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A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

A) True
B) False

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Figure 14-1. The figure shows a utility function. Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. For the person to whom this utility function applies, A) the more wealth she has, the less utility she gets from an additional dollar of wealth. B) the more wealth she has, the more utility she gets from an additional dollar of wealth. C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. -Refer to Figure 14-1. For the person to whom this utility function applies,


A) the more wealth she has, the less utility she gets from an additional dollar of wealth.
B) the more wealth she has, the more utility she gets from an additional dollar of wealth.
C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600.
D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

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

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List three different ways that a risk-averse person can reduce financial risk.

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A risk-averse person can reduce risk by ...

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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


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

Correct Answer

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Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.


A) This stock is overvalued; you should consider adding it to your portfolio.
B) This stock is overvalued; you shouldn't consider adding it to your portfolio.
C) This stock is undervalued; you should consider adding it to your portfolio.
D) This stock is undervalued; you shouldn't consider adding it to your portfolio.

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

Correct Answer

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You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?


A) The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B.
B) The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B.
C) The interest rates on the two loans are the same.
D) There is not enough information to determine which loan has the higher interest rate.

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

Correct Answer

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B

Figure 14-1. The figure shows a utility function. Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there, 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. -Refer to Figure 14-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,


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

Correct Answer

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What is the future value of $500 one year from today if the interest rate is 6 percent?


A) $515
B) $520
C) $530
D) None of the above is correct.

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

Correct Answer

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The efficient markets hypothesis implies


A) that all stocks are fairly valued all the time and that no stock is a better buy than any other.
B) that all stocks are fairly valued all the time, but that some stocks may be better buys than other.
C) that some stocks may be better buys than others and stock experts can determine which ones.
D) that no stock is efficiently valued.

E) None of the above
F) All of the above

Correct Answer

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Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $5,000 or (2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is


A) 2 percent, but not if the interest rate is 3 percent.
B) 3 percent, but not if the interest rate is 4 percent.
C) 4 percent, but not if the interest rate is 5 percent.
D) 5 percent, but not if the interest rate is 6 percent.

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

Correct Answer

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Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?


A) about $860
B) about $870
C) about $880
D) about $890

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

Correct Answer

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D

Showing 1 - 20 of 419

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