Question 1

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

Accepted Answer

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

Question 2

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Accepted Answer

A)   $180
B)   $181.82
C)   $220
D)   $222.22E) A) and C)
F) B) and C)

Question 3

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

Accepted Answer

A)   $414.09.
B)   $434.00.
C)   $441.87.
D)   $481.24.E) All of the above
F) B) and D)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A)   80 to 100.
B)   40 to 80.
C)   10 to 20.
D)   1 to 10.E) A) and B)
F) A) and C)

Question 6

The K-Nine dog food company is considering the purchase of additional canning equipment.They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that.At which of the following prices and interest rates would K-Nine buy the equipment?

Accepted Answer

A)   $415,000 if the interest rate is 5%
B)   $419,000 if the interest rate is 4%
C)   K-Nine would buy the equipment in both cases.
D)   K-Nine would not buy the equipment in either case.E) A) and B)
F) A) and C)

Question 7

You are expecting to receive $1,000 at some time in the future.Which of the following would unambiguously decrease the present value of this future payment?

Accepted Answer

A)   Interest rates rise and you get the payment sooner.
B)   Interest rates rise and you have to wait longer for the payment.
C)   Interest rates fall and you get the payment sooner.
D)   Interest rates fall and you have to wait longer to get the payment.E) C) and D)
F) B) and D)

Question 8

If stock prices follow a random walk,it means

Accepted Answer

A)   long periods of declining prices are followed by long periods of rising prices.
B)   the greater the number of consecutive days of price declines,the greater the probability prices will increase the following day.
C)   stock prices are unrelated to random events that shock the economy.
D)   stock prices are just as likely to rise as to fall at any given time.E) A) and D)
F) B) and C)

Question 9

Which of the following is correct?

Accepted Answer

A)   Risk-averse people will not hold stock.
B)   Diversification cannot reduce firm-specific risk.
C)   The larger the percentage of stock in a portfolio,the greater the risk,but the greater the average return.
D)   Stock prices are determined by fundamental analysis rather than by supply and demand.E) A) and C)
F) A) and B)

Question 10

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $370.06?

Accepted Answer

A)   10
B)   14
C)   17
D)   20E) A) and C)
F) None of the above

Question 11

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) None of the above

Question 12

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

Question 13

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Accepted Answer

A)   provide a higher return than the market average.
B)   provide a lower return than the market average.
C)   pay higher returns when interest rates rise and lower returns when interest rates fall.
D)   pay lower returns when interest rates rise and higher returns when interest rates fall.E) C) and D)
F) B) and D)

Question 14

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Accepted Answer

A)   5
B)   7
C)   9
D)   11E) A) and D)
F) All of the above

Question 15

The utility function of a risk-averse person has a

Accepted Answer

A)   positive slope and gets steeper as wealth increases.
B)   positive slope but gets flatter as wealth increases.
C)   negative slope but gets steeper as wealth increases.
D)   negative slope and gets flatter as wealth increases.E) B) and C)
F) A) and D)

Question 16

On May 25,1978 three pals graduated from high school,pooled together $1,000 and put the money into an account promising to pay 8% for the next 30 years.On May 25,2008 they withdrew all the money from the account.To the nearest dollar,how much did they withdraw?

Accepted Answer

A)   $2,400
B)   $10,063
C)   $32,400
D)   None of the above are correct to the nearest dollar.E) B) and C)
F) A) and D)

Question 17

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   7 percentE) C) and D)
F) B) and D)

Question 18

A person with diminishing marginal utility of wealth is risk averse.

Accepted Answer

A) True 
 B)False

Question 19

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 D)

Question 20

Historically,stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Exam 27: The Basic Tools of Finance

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Correct Answer
verified

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $370.06?

Correct Answer
verified

Historically,stocks have offered higher rates of return than bonds.

Correct Answer
verified

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Correct Answer
verified

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

Correct Answer
verified

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Correct Answer
verified

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

On May 25,1978 three pals graduated from high school,pooled together $1,000 and put the money into an account promising to pay 8% for the next 30 years.On May 25,2008 they withdrew all the money from the account.To the nearest dollar,how much did they withdraw?

Correct Answer
verified

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

Correct Answer
verified

If stock prices follow a random walk,it means

Correct Answer
verified

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

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

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Correct Answer
verified

You are expecting to receive $1,000 at some time in the future.Which of the following would unambiguously decrease the present value of this future payment?

Correct Answer
verified

A person with diminishing marginal utility of wealth is risk averse.

Correct Answer
verified

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

Correct Answer
verified

The utility function of a risk-averse person has a

Correct Answer
verified

Which of the following is correct?

Correct Answer
verified

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Correct Answer
verified

Exam 27: The Basic Tools of Finance

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Correct AnswerverifiedShow Answer

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $370.06?

Correct AnswerverifiedShow Answer

Historically,stocks have offered higher rates of return than bonds.

Correct AnswerverifiedShow Answer

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Correct AnswerverifiedShow Answer

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

On May 25,1978 three pals graduated from high school,pooled together $1,000 and put the money into an account promising to pay 8% for the next 30 years.On May 25,2008 they withdrew all the money from the account.To the nearest dollar,how much did they withdraw?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If stock prices follow a random walk,it means

Correct AnswerverifiedShow Answer

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

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

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Correct AnswerverifiedShow Answer

You are expecting to receive $1,000 at some time in the future.Which of the following would unambiguously decrease the present value of this future payment?

Correct AnswerverifiedShow Answer

A person with diminishing marginal utility of wealth is risk averse.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The utility function of a risk-averse person has a

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Correct AnswerverifiedShow Answer

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