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Exam 14: The Basic Tools of Finance

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Question 51

Multiple Choice

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Amelia knows that she has about $105 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) $98.18
B) $100.96
C) $102.04
D) $103.24

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

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Question 52

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Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

A) True
B) False

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Question 53

Multiple Choice

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Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Until recently, shares of stock accounted for 40 percent of Jimmy's savings. A few days ago, Jimmy sold some bonds and bought some additional shares of stock. Now shares of stock account for 70 percent of Jimmy's savings. How did this change affect Jimmy's expected retun on his savings? How did it affect the risks he faces?

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Cleo promises to pay Jacques $1,000 two years from today. If the interest rate is 4 percent, then how much is this future payment worth today?

Diversification of a portfolio

From the standpoint of the economy as a whole, the role of

A firm has three 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 $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 C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?

Risk-averse persons will take no risks.

If asset markets are driven by the "animal spirits" of investors, then

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

The rule of 70 applies to a growing savings account but not to a growing economy.

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be