Question 1

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Accepted Answer

A)   These are both examples of adverse selection.
B)   These are both examples of moral hazard.
C)   The first example illustrates adverse selection, and the second illustrates moral hazard.
D)   The first example illustrates moral hazard, and the second illustrates adverse selection.E) A) and B)
F) A) and C)

Question 2

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Accepted Answer

A)   $66,225.25
B)   $67,556.42
C)   $68,058.32
D)   $71,428.57E) A) and B)
F) A) and C)

Question 3

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)   rises, so investment spending rises.
B)   falls, so investment spending rises.
C)   rises, so investment spending falls.
D)   falls, so investment spending falls.E) A) and C)
F) A) and B)

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) A) and D)
F) A) and C)

Question 5

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A)   raise the price and raise the present value of the corporation's stock.
B)   raise the price and lower the present value of the corporation's stock.
C)   lower the price and raise the present value of the corporation's stock.
D)   lower the price and lower the present value of the corporation's stock.E) A) and B)
F) A) and C)

Question 6

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) B) and C)

Question 7

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A)   the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions.
B)   the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions.
C)   the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions.
D)   the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.E) A) and D)
F) B) and C)

Question 8

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Accepted Answer

A)   8 percent
B)   9 percent
C)   10 percent
D)   None of the above is correct.E) None of the above
F) B) and D)

Question 9

Economists have developed models of risk aversion using the concept of

Accepted Answer

A)   utility and the associated assumption of diminishing marginal utility.
B)   utility and the associated assumption of increasing marginal utility.
C)   income and the associated assumption of diminishing marginal wealth.
D)   income and the associated assumption of increasing marginal wealth.E) C) and D)
F) A) and B)

Question 10

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   Option DE) All of the above
F) A) and B)

Question 11

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)   Britney is risk averse.
B)   Britney gains more satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars.
C)   the property of increasing marginal utility applies to Britney.
D)   All of the above are correct.E) None of the above
F) A) and D)

Question 12

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

Accepted Answer

A)   increase the risk of her portfolio.
B)   decrease some, but not all, of the risk of her portfolio.
C)   decrease all of the risk of her portfolio.
D)   leave the risk of her portfolio unchanged from its present level.E) All of the above
F) A) and B)

Question 13

Should a person who is risk averse hold a portfolio with no stock and only bonds?
Explain.

Accepted Answer

Not necessarily. Historically bonds have...

Question 14

If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?

Accepted Answer

A)   $320.69
B)   $324.00
C)   $324.73
D)   $327.81E) A) and D)
F) A) and C)

Question 15

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 9% interest rate, the present val...

Question 16

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Accepted Answer

A)   $3,494.40
B)   $3,585.85
C)   $3,601.89
D)   $3,676.14E) None of the above
F) B) and D)

Question 17

Scenario 27-2
Suppose Dave has a utility function  where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for  .

Accepted Answer

Here is th...

Question 18

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Accepted Answer

Only news that changes the pub...

Question 19

Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's account worth today?

Accepted Answer

A)   $1,225.38
B)   $1,248.48
C)   $1,264.72
D)   $1,273.45E) C) and D)
F) None of the above

Question 20

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

Exam 14: The Basic Tools of Finance

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for .

Correct Answer
verified
Here is th...
View Answer

Correct Answer
verified

The problem of moral hazard arises because

Correct Answer
verified

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Correct Answer
verified

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Correct Answer
verified

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Correct Answer
verified

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct Answer
verified

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Correct Answer
verified

Which of the following is correct?

Correct Answer
verified

Economists have developed models of risk aversion using the concept of

Correct Answer
verified

If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?

Correct Answer
verified

Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's account worth today?

Correct Answer
verified

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

Correct Answer
verified

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Correct Answer
verified

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Correct Answer
verified
Only news that changes the pub...
View Answer

A bank might make mortgages to people in different regions of the country. By doing so

Correct Answer
verified

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Correct Answer
verified
With a 9% interest rate, the present val...
View Answer

Correct Answer
verified

Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

Correct Answer
verified
Not necessarily. Historically bonds have...
View Answer

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Correct Answer
verified

Exam 14: The Basic Tools of Finance

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for .

Correct AnswerverifiedHere is th...View AnswerShow Answer

Correct AnswerverifiedShow Answer

The problem of moral hazard arises because

Correct AnswerverifiedShow Answer

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Correct AnswerverifiedShow Answer

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Correct AnswerverifiedShow Answer

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Correct AnswerverifiedShow Answer

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct AnswerverifiedShow Answer

You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

Economists have developed models of risk aversion using the concept of

Correct AnswerverifiedShow Answer

If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?

Correct AnswerverifiedShow Answer

Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's account worth today?

Correct AnswerverifiedShow Answer

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

Correct AnswerverifiedShow Answer

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Correct AnswerverifiedOnly news that changes the pub...View AnswerShow Answer

A bank might make mortgages to people in different regions of the country. By doing so

Correct AnswerverifiedShow Answer

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Correct AnswerverifiedWith a 9% interest rate, the present val...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

Correct AnswerverifiedNot necessarily. Historically bonds have...View AnswerShow Answer

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Correct AnswerverifiedShow Answer

Correct Answer
verified
Here is th...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Only news that changes the pub...
View Answer

Correct Answer
verified

Correct Answer
verified
With a 9% interest rate, the present val...
View Answer

Correct Answer
verified

Correct Answer
verified
Not necessarily. Historically bonds have...
View Answer

Correct Answer
verified