Question 1

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 D)
F) None of the above

Question 2

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Accepted Answer

A)  $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years.
B)  $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years.
C)  $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years.
D)  $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.E) B) and C)
F) A) and B)

Question 3

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 4

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Market risk refers to economywide risk c...

Question 5

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) C) and D)

Question 6

Consider the following two situations. Nicole accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Braden buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Accepted Answer

A)  both Nicole's and Braden's
B)  Nicole's but not Braden's
C)  Braden's but not Nicole's
D)  neither Braden's nor Nicole'sE) All of the above
F) C) and D)

Question 7

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

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

Question 8

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you'd use on your own car.

Accepted Answer

A)  Both examples primarily illustrate adverse selection.
B)  Both examples primarily illustrate moral hazard.
C)  The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard.
D)  The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.E) A) and B)
F) A) and C)

Question 9

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Accepted Answer

A)  You receive the payment 3 years from now and the interest rate is 8 percent.
B)  You receive the payment 3 years from now and the interest rate is 6 percent.
C)  You receive the payment 2 years from now and the interest rate is 8 percent.
D)  You receive the payment 2 years from now and the interest rate is 6 percent.E) All of the above
F) None of the above

Question 10

Suppose you win a small lottery and you are given the following choice: You can (1)  receive an immediate payment of $10,000 or (2)  three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Accepted Answer

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

Question 11

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

Question 12

As the number of stocks in a portfolio rises,

Accepted Answer

A)  both firm-specific risks and market risk fall.
B)  firm-specific risks fall; market risk does not.
C)  market risk falls; firm-specific risks do not.
D)  neither firm-specific risks nor market risk falls.E) All of the above
F) B) and C)

Question 13

Belinda knows that she has about $95 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Accepted Answer

A)  $91.00
B)  $91.20
C)  $91.27
D)  $91.35E) A) and D)
F) B) and D)

Question 14

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

Question 15

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Accepted Answer

A)  $9,090.91
B)  $10,000.00
C)  $8,264.46
D)  $9,523.81E) A) and B)
F) B) and C)

Question 16

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

A) True 
 B)False

Question 17

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

Accepted Answer

A)  3
B)  4
C)  5
D)  7E) A) and D)
F) A) and C)

Question 18

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Accepted Answer

A) True 
 B)False

Question 19

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Accepted Answer

A)  increasing marginal utility of wealth and is risk averse.
B)  increasing marginal utility of wealth but is not risk averse.
C)  decreasing marginal utility of wealth and is risk averse.
D)  decreasing marginal utility of wealth but is not risk averse.E) B) and D)
F) None of the above

Question 20

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

Accepted Answer

A)  $2,420.68
B)  $2,591.85
C)  $2,996.33
D)  $3,040.63E) A) and C)
F) B) and D)

Exam 14: The Basic Tools of Finance

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

Correct Answer
verified

Belinda knows that she has about $95 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Correct Answer
verified

As the number of stocks in a portfolio rises,

Correct Answer
verified

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

Correct Answer
verified

The utility function of a risk-averse person has a

Correct Answer
verified

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Correct Answer
verified

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

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

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Correct Answer
verified

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

Correct Answer
verified

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Correct Answer
verified

Risk aversion simply means that people dislike bad things to happen.

Correct Answer
verified

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Correct Answer
verified

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you'd use on your own car.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Consider the following two situations. Nicole accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Braden buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Correct Answer
verified

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Correct Answer
verified

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Correct Answer
verified

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Correct Answer
verified
Market risk refers to economywide risk c...
View Answer

Exam 14: The Basic Tools of Finance

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

Correct AnswerverifiedShow Answer

Belinda knows that she has about $95 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Correct AnswerverifiedShow Answer

As the number of stocks in a portfolio rises,

Correct AnswerverifiedShow Answer

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

Correct AnswerverifiedShow Answer

The utility function of a risk-averse person has a

Correct AnswerverifiedShow Answer

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Correct AnswerverifiedShow Answer

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

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

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Correct AnswerverifiedShow Answer

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Correct AnswerverifiedShow Answer

Risk aversion simply means that people dislike bad things to happen.

Correct AnswerverifiedShow Answer

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Correct AnswerverifiedShow Answer

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you'd use on your own car.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Consider the following two situations. Nicole accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Braden buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Correct AnswerverifiedShow Answer

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Correct AnswerverifiedShow Answer

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Correct AnswerverifiedShow Answer

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Correct AnswerverifiedMarket risk refers to economywide risk c...View AnswerShow Answer

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Market risk refers to economywide risk c...
View Answer