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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?


A) $91.00
B) $91.20
C) $91.27
D) $91.35

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

Correct Answer

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According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

A) True
B) False

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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?.


A) 8 percent, $15,000
B) 7 percent, $16,000
C) 6 percent, $17,000
D) All of the above are correct.

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

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When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?


A) $1,200.00
B) $1,111.77
C) $983.58
D) $859.09

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

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You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?


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

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Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

A) True
B) False

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

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 $2,000 to save for two years?


A) an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account
B) an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account
C) an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account
D) an interest rate of 4.5 percent, with no processing fee and no bonus

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

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

Correct Answer

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Stock market fluctuations


A) often go hand in hand with fluctuations in the economy more broadly.
B) rarely have anything to do with fluctuations in the economy more broadly.
C) have few, if any, macroeconomic implications.
D) are attributable to the widespread belief that the efficient markets hypothesis is correct.

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

Correct Answer

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What is the future value of $450 at an interest rate of 9 percent two years from today?


A) $534.65
B) $546.35
C) $565.18
D) $574.13

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

Correct Answer

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Toni put $500 into an account and one year later she had $534. What interest rate was paid on Toni's deposit?


A) 7.1 percent
B) 5.9 percent
C) 6.8 percent
D) None of the above is correct.

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

Correct Answer

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

A) True
B) False

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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?


A) $1,133.31
B) $1,120.00
C) $1,123.50
D) None of the above are correct to the nearest cent.

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

Correct Answer

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Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the highest present value today?


A) Option A
B) Option B
C) Option C
D) Option D

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

Correct Answer

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If stock prices follow a random walk, then stock investors can make large profits by


A) buying stocks whose prices have been falling for several days.
B) buying stocks whose prices have been rising for several days.
C) performing fundamental analysis of stocks using data contained in annual reports.
D) using inside information.

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

Correct Answer

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A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was


A) 9% but not 10%
B) 10% but not 11%
C) 11% but not 12%
D) None of the above is correct; a risk averse person would not accept any of the above bets.

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

Correct Answer

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Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?


A) $1,000 (1.06)
B) $1,000(1.06)
C) $1,000/(1.06)
D) None of the above is correct.

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

Correct Answer

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


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

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

Correct Answer

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An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

A) True
B) False

Correct Answer

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