Question 1

Suppose your bank account pays a 4% interest rate. You are considering purchasing a share of stock in ABC Corporation for $500. The stock will pay you a $10 dividend at the end of years 1, 2, and 3. You expect to be able to sell the stock at the end of year 3 for $550. Is ABC a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of the inves...

Question 2

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that ...

Question 3

If you believe that stock prices follow a random walk, then probably you

Accepted Answer

A)   do not believe that there is positive relationship between risk and return.
B)   do not believe that stock prices reflect all available information.
C)   believe in the validity of the efficient markets hypothesis.
D)   believe that it is a good idea to engage in fundamental analysis.E) B) and D)
F) A) and D)

Question 4

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Accepted Answer

A)   marginal utility diminishes as wealth rises, so he must be risk averse.
B)   marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse.
C)   marginal utility increases as wealth rises, so he must be risk averse.
D)   marginal utility increases as wealth rises, but we can't tell from this if he is risk averse.E) B) and D)
F) A) and B)

Question 5

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A)   Stock prices should follow a random walk.
B)   Index funds should typically outperform highly managed funds.
C)   News has no effect on stock prices.
D)   There is little point in spending many hours studying the business pages looking for undervalued stocks.E) A) and B)
F) A) and C)

Question 6

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Accepted Answer

A) True 
 B)False

Question 7

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Accepted Answer

A) True 
 B)False

Question 8

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Accepted Answer

A) True 
 B)False

Question 9

A risk-averse person has

Accepted Answer

A)   utility and marginal utility curves that slope upward.
B)   utility and marginal utility curves that slope downward.
C)   a utility curve that slopes down and a marginal utility curve that slopes upward.
D)   a utility curve that slopes upward and a marginal utility curve that slopes downward.E) A) and B)
F) A) and C)

Question 10

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Accepted Answer

A)   she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails."
B)   the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth.
C)   the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth.
D)   the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.E) A) and B)
F) All of the above

Question 11

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Accepted Answer

A)   $210
B)   $220
C)   $240
D)   $250E) A) and C)
F) None of the above

Question 12

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   7 percentE) B) and D)
F) None of the above

Question 13

The efficient markets hypothesis implies

Accepted Answer

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

Question 14

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A)   $240.38
B)   $242.24
C)   $244.40
D)   None of the above are correct to the nearest cent.E) None of the above
F) A) and D)

Question 15

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Accepted Answer

A)   rise, and investment spending rise.
B)   rise, and investment spending fall.
C)   fall, and investment spending rise.
D)   fall, and investment spending fall.E) C) and D)
F) None of the above

Question 16

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)   Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO.
B)   Simpson announces that its profits were low, but not as low as the market had expected.
C)   Analysis by a column in a business weekly indicates that Simpson is overvalued.
D)   All of the above would increase the price.E) A) and D)
F) A) and C)

Question 17

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Accepted Answer

The presen...

Question 18

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

Accepted Answer

A)   The first is lowest; the second is highest.
B)   The second is lowest; the third is highest.
C)   The third is lowest; the fourth is highest.
D)   The fourth is lowest; the first is highest.E) None of the above
F) C) and D)

Question 19

You have a choice among three options. 
Option 1: receive $900 immediately. 
Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. 
The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Accepted Answer

A)   Option 1; Option 2; Option 3
B)   Option 3; Option 2; Option 1
C)   Option 2; Option 3; Option 1
D)   Option 3; Option 1; Option 2E) A) and D)
F) All of the above

Question 20

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Accepted Answer

The answer of Write the formula to find the present...

Exam 19: The Basic Tools of Finance

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Correct Answer
verified
The presen...
View Answer

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Correct Answer
verified

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Correct Answer
verified

The efficient markets hypothesis implies

Correct Answer
verified

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Correct Answer
verified

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Correct Answer
verified

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Correct Answer
verified

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Correct Answer
verified

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Correct Answer
verified

Correct Answer
verified

A risk-averse person has

Correct Answer
verified

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Correct Answer
verified

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Correct Answer
verified

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct Answer
verified
An example of adverse selection is that ...
View Answer

If you believe that stock prices follow a random walk, then probably you

Correct Answer
verified

Which of the following is not consistent with the efficient market hypothesis?

Correct Answer
verified

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Correct Answer
verified

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Correct Answer
verified

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Correct Answer
verified

Correct Answer
verified
The present value of the inves...
View Answer

Exam 19: The Basic Tools of Finance

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Correct AnswerverifiedThe presen...View AnswerShow Answer

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Correct AnswerverifiedShow Answer

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Correct AnswerverifiedShow Answer

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Correct AnswerverifiedShow Answer

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Correct AnswerverifiedShow Answer

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A risk-averse person has

Correct AnswerverifiedShow Answer

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Correct AnswerverifiedShow Answer

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Correct AnswerverifiedShow Answer

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct AnswerverifiedAn example of adverse selection is that ...View AnswerShow Answer

If you believe that stock prices follow a random walk, then probably you

Correct AnswerverifiedShow Answer

Which of the following is not consistent with the efficient market hypothesis?

Correct AnswerverifiedShow Answer

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Correct AnswerverifiedShow Answer

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe present value of the inves...View AnswerShow Answer

Correct Answer
verified
The presen...
View Answer

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Correct Answer
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Correct Answer
verified
An example of adverse selection is that ...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
The present value of the inves...
View Answer