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Discounting refers directly to


A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) calculations that ignore the phenomenon of compounding for the sake of ease and simplicity.
D) decreases in interest rates over time, while compounding refers to increases in interest rates over time.

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

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Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease


A) firm specific risk and market risk.
B) firm specific risk but not market risk.
C) market risk but not firm specific risk.
D) neither firm specific nor market risk.

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

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Some people claim that stocks follow a random walk. What does this mean?


A) The price of stock one day is about what it was on the previous day.
B) Changes in stock prices cannot be predicted from available information.
C) Stock prices are not determined by market fundamentals such as supply and demand.
D) Prices of stocks of different firms in the same industry show no or little tendency to move together.

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

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Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?


A) $1001 + .0410)
B) $1001 + .04 Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years? A) $1001 + .0410) B) $1001 + .04 10) C) $100 × 10 1 + .04) D) $1001 + .04) 10 10)
C) $100 × 10 Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years? A) $1001 + .0410) B) $1001 + .04 10) C) $100 × 10 1 + .04) D) $1001 + .04) 10 1 + .04)
D) $1001 + .04) 10

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

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Figure 27-2. The figure shows a utility function for Britney. Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose the vertical distance between the points 0, A) and 0, B) is 5. If her wealth increased from $1,050 to $1,350, then A) Britney's subjective measure of her well­being would increase by less than 5 units. B) Britney's subjective measure of her well­being would increase by more than 5 units. C) Britney would change from being a risk-averse person into a person who is not risk averse. D) Britney would change from being a person who is not risk averse into a risk-averse person. -Refer to Figure 27-2. Suppose the vertical distance between the points 0, A) and 0, B) is 5. If her wealth increased from $1,050 to $1,350, then


A) Britney's subjective measure of her well­being would increase by less than 5 units.
B) Britney's subjective measure of her well­being would increase by more than 5 units.
C) Britney would change from being a risk-averse person into a person who is not risk averse.
D) Britney would change from being a person who is not risk averse into a risk-averse person.

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

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Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?


A) $22,880.00
B) $23,200.00
C) $23,232.00
D) $23,328.00

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

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Suppose you win a small lottery and you are given the following choice: You can receive 1) an immediate payment of $5,000 or 2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is


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

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According to the efficient market hypothesis


A) changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds.
B) changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds.
C) changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds.
D) changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.

E) None of the above
F) All of the above

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James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if


A) X < 1,045.00.
B) X < 1,188.89.
C) X < 1,266.67.
D) X < 1,360.86.

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

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You are better off choosing $100 today rather than $200 in 9 years if the interest rate is


A) lower than about 8 percent.
B) higher than about 8 percent.
C) lower than about 10 percent.
D) higher than about 10 percent.

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

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The future value of a deposit in a savings account will be larger


A) the longer a person waits to withdraw the funds.
B) the higher the interest rate is.
C) the larger the initial deposit is.
D) All of the above are correct.

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

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What is the future value of $750 one year from today if the interest rate is 2.5 percent?


A) $766.50
B) $768.75
C) $770.23
D) None of the above are correct to the nearest cent.

E) None of the above
F) All of the above

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According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

A) True
B) False

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Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay


A) $140,000, but not $150,000.
B) $150,000, but not $160,000.
C) $160,000, but not $170,000.
D) $170,000, but not $180,000.

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

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At which interest rate is the present value of $95.40 one year from today equal to $90 today?


A) 4 percent
B) 5 percent
C) 6 percent
D) 7 percent

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

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You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,154 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,477.10 one year from today. In order for the same interest rate to apply to the two loans, X =


A) $2,300.00.
B) $2,450.00.
C) $2,500.00.
D) $2,525.50.

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

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Albert Einstein once referred to compounding as


A) "an obsession among economists that defies explanation."
B) "the greatest mathematical discovery of all time."
C) his own discovery.
D) John Maynard Keynes's greatest contribution.

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

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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?


A) $210
B) $220
C) $240
D) $250

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

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John has been a sky diver for many years. When the company John works for offers its employees the option to purchase a life insurance policy, John purchases a policy. This illustrates the problem of


A) moral hazard.
B) adverse selection.
C) risk-return tradeoff.
D) diversification.

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

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Thompson Corporation is considering the purchase of a new piece of machinery. Thompson expects the new machinery to increase its revenues by $70,000 at the end of year 1, $60,000 at the end of year 2, and $50,000 at the end of year 3 at which point the machinery will have exhausted its useful life. If the interest rate is 4%, what is the most Thompson should be willing to pay today for this piece of machinery?

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The present value of the futur...

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