Question 1

Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?

Accepted Answer

A)   $100(1 + .0410) 
B)   $100(1 + .0410) 
C)   $100 x 10 x (1 + .04) 
D)   $100(1 + .04) 10E) A) and C)
F) A) and D)

Question 2

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

Accepted Answer

A)   the demand for bank stocks rise which would raise the prices of bank stocks.
B)   the demand for bank stocks rise which would reduce the prices of bank stocks.
C)   the demand for bank stocks fall which would raise the prices of bank stocks.
D)   the demand for bank stocks fall which would reduce the prices of bank stocks.E) None of the above
F) A) and B)

Question 3

Whenever the price of an asset rises above what appears to be its fundamental value,the market is said to be experiencing

Accepted Answer

A)   a conjectural mistake.
B)   a fundamental mishap.
C)   a speculative bubble.
D)   a neuroeconomic flaw.E) A) and B)
F) B) and D)

Question 4

The problem of moral hazard arises because

Accepted Answer

A)   life is full of all sorts of risks.
B)   after people buy insurance,they have less incentive to be careful about their risky behavior.
C)   a high-risk person is more likely to apply for insurance than is a low-risk person.
D)   insurance companies go to great effort to avoid paying claims to their policy holders.E) B) and C)
F) All of the above

Question 5

In which of the following games is it conceivable that a risk-averse person might be willing to play?

Accepted Answer

A)   a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1
B)   a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100
C)   a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1
D)   a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1E) A) and B)
F) A) and C)

Question 6

By purchasing shares in a mutual fund that holds a portfolio of stocks,a person can

Accepted Answer

A)   benefit from fundamental analysis,since the mutual fund requires its shareholders to perform fundamental analysis on their own.
B)   benefit from fundamental analysis,since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
C)   eliminate market risk.
D)   reduce the standard deviation of his or her portfolio to zero.E) A) and B)
F) All of the above

Question 7

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

Question 8

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 9

Using the rule of 70,about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Accepted Answer

A)   $400
B)   $800
C)   $1,600
D)   $3,200E) A) and B)
F) B) and C)

Question 10

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth and is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth and is not risk averse.E) A) and D)
F) A) and C)

Question 11

Twenty years ago,Dr.Montgomery borrowed money from her parents to pay her tuition at graduate school.Now she wants to pay them back.She gives them double what they gave her.According to the rule of 70,what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?

Accepted Answer

A)   3.5 percent
B)   4.5 percent
C)   5 percent
D)   7 percentE) A) and C)
F) B) and C)

Question 12

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Accepted Answer

A)   $95.50
B)   $95.24
C)   $95.00
D)   None of the above are correct to the nearest cent.E) B) and C)
F) None of the above

Question 13

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

Accepted Answer

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) All of the above
F) None of the above

Question 14

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 15

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

Accepted Answer

For example at 3 percent the p...

Question 16

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) All of the above
F) None of the above

Question 17

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

Accepted Answer

A)   Higher average returns come at the price of higher risk.
B)   People who are risk averse should never hold stock.
C)   Diversification cannot eliminate all of the risk in stock portfolio.
D)   None of her conclusions are incorrect.E) A) and C)
F) B) and D)

Question 18

If you are faced with the choice of receiving $500 today or $800 6 years from today,you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Accepted Answer

A) True 
 B)False

Question 19

The performance of index funds

Accepted Answer

A)   is seldom,if ever,superior to the performance of actively-managed funds.
B)   provides evidence in support of the notion that stock prices do not depend upon supply and demand.
C)   provides evidence in support of the efficient markets hypothesis.
D)   provides evidence in support of the notion that stock-market participants are irrational.E) A) and B)
F) B) and D)

Question 20

If the efficient markets hypothesis is correct,then

Accepted Answer

A)   the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy.
B)   the stock market is informationally efficient.
C)   stock prices never follow a random walk.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Exam 27: The Basic Tools of Finance

Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?

Correct Answer
verified

Correct Answer
verified

If you are faced with the choice of receiving $500 today or $800 6 years from today,you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Correct Answer
verified

By purchasing shares in a mutual fund that holds a portfolio of stocks,a person can

Correct Answer
verified

Whenever the price of an asset rises above what appears to be its fundamental value,the market is said to be experiencing

Correct Answer
verified

The performance of index funds

Correct Answer
verified

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Correct Answer
verified

Correct Answer
verified

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Correct Answer
verified

In which of the following games is it conceivable that a risk-averse person might be willing to play?

Correct Answer
verified

The problem of moral hazard arises because

Correct Answer
verified

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

Correct Answer
verified

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

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

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Correct Answer
verified

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

Correct Answer
verified

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

Correct Answer
verified
For example at 3 percent the p...
View Answer

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

Correct Answer
verified

Using the rule of 70,about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Correct Answer
verified

If the efficient markets hypothesis is correct,then

Correct Answer
verified

Exam 27: The Basic Tools of Finance

Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If you are faced with the choice of receiving $500 today or $800 6 years from today,you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Correct AnswerverifiedShow Answer

By purchasing shares in a mutual fund that holds a portfolio of stocks,a person can

Correct AnswerverifiedShow Answer

Whenever the price of an asset rises above what appears to be its fundamental value,the market is said to be experiencing

Correct AnswerverifiedShow Answer

The performance of index funds

Correct AnswerverifiedShow Answer

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Correct AnswerverifiedShow Answer

In which of the following games is it conceivable that a risk-averse person might be willing to play?

Correct AnswerverifiedShow Answer

The problem of moral hazard arises because

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

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

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

Correct AnswerverifiedFor example at 3 percent the p...View AnswerShow Answer

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

Correct AnswerverifiedShow Answer

Using the rule of 70,about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Correct AnswerverifiedShow Answer

If the efficient markets hypothesis is correct,then

Correct AnswerverifiedShow Answer

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For example at 3 percent the p...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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