Question 1

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Accepted Answer

A)   provide a higher return than the market average.
B)   provide a lower return than the market average.
C)   pay higher returns when interest rates rise and lower returns when interest rates fall.
D)   pay lower returns when interest rates rise and higher returns when interest rates fall.E) A) and D)
F) B) and C)

Question 2

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) None of the above
F) All of the above

Question 3

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Accepted Answer

A)   $2,000(1.06) 
B)   $1,000 + $(1.06) 2
C)   $1,000(1.06) 2
D)   None of the above are correct.E) A) and B)
F) A) and C)

Question 4

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?

Accepted Answer

A)   $540.75
B)   $540.80
C)   $540.85
D)   None of the above are correct to the nearest cent.E) A) and D)
F) All of the above

Question 5

A person with diminishing marginal utility of wealth is risk averse.

Accepted Answer

A) True 
 B)False

Question 6

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False

Question 7

Write the rule of 70.Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600.Use the rule of 70 to determine about what interest rate she earned.

Accepted Answer

$1,600/$50 = 32.The rule of 70 says that...

Question 8

What is the present value of a payment of $100 to be made one year from today if the interest rate is 5 percent?

Accepted Answer

A)   $105.26
B)   $105.00
C)   $95.24
D)   $95.00E) A) and B)
F) A) and C)

Question 9

Suppose you will receive $500 at some point in the future.If the annual interest rate is 7.5 percent,then the present value of the $500 is

Accepted Answer

A)   $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years.
B)   $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years.
C)   $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years.
D)   $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.E) B) and C)
F) None of the above

Question 10

Which of the following is correct concerning stock market irrationality?

Accepted Answer

A)   Bubbles could arise,in part,because the price that people pay for stock depends on what they think someone else will pay for it in the future.
B)   Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important.
C)   Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market.
D)   All of the above are correct.E) A) and B)
F) All of the above

Question 11

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years,you will have $998.25 in your account.If your accountant is correct,what is the current interest rate?

Accepted Answer

A)   9 percent
B)   10 percent
C)   11 percent
D)   12 percentE) B) and D)
F) A) and B)

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

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 14

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks.This is an example of

Accepted Answer

A)   firm-specific risk,which will likely raise shareholders' demand for higher return.
B)   firm-specific risk,which will likely not likely raise shareholders' demand for higher return.
C)   market risk,which will likely raise shareholders' demand for higher return.
D)   market risk,which will likely not raise shareholders' demand for higher return.E) B) and D)
F) None of the above

Question 15

Figure 19-2.The figure shows a utility function for Mary Ann. 
-Refer to Figure 19-2.From the appearance of the utility function,we know that

Accepted Answer

A)   if Mary Ann owns a house,she would not consider buying fire insurance.
B)   Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.
C)   Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
D)   All of the above are correct.E) A) and B)
F) B) and C)

Question 16

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?

Accepted Answer

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

Question 17

If the interest rate is r percent,then the rule of 70 says that your savings will double about every

Accepted Answer

A)   70/(1 - r) years.
B)   70/(1 + r) years.
C)   70/r years.
D)   70(1 + r) /r years.E) All of the above
F) C) and D)

Question 18

Diversification can reduce firm-specific risk.

Accepted Answer

A) True 
 B)False

Question 19

Figure 19-4.The figure shows a utility function for Dexter. 
-Refer to Figure 19-4.Suppose Dexter begins with $1,300 in wealth.Starting from there,

Accepted Answer

A)   the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B)   the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C)   the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D)   This cannot be determined from the graph.E) A) and B)
F) A) and C)

Question 20

Which of the following is not correct?

Accepted Answer

A)   A risk averse person might be willing to hold stocks.
B)   Other things the same,a portfolio with the stocks of a large number of companies has less risk.
C)   Other things the same,the larger a portion of savings a person invests in stocks,the greater his expected return.
D)   Diversification can eliminate market risk but not firm-specific risk.E) C) and D)
F) B) and D)

Exam 19: The Basic Tools of Finance

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?

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years,you will have $998.25 in your account.If your accountant is correct,what is the current interest rate?

Correct AnswerverifiedShow Answer

Write the rule of 70.Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600.Use the rule of 70 to determine about what interest rate she earned.

Correct Answerverified$1,600/$50 = 32.The rule of 70 says that...View AnswerShow Answer

Figure 19-2.The figure shows a utility function for Mary Ann. -Refer to Figure 19-2.From the appearance of the utility function,we know that

Correct AnswerverifiedShow Answer

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks.This is an example of

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

The future value of $1 saved today is $1/(1 + r).

Correct AnswerverifiedShow Answer

If the interest rate is r percent,then the rule of 70 says that your savings will double about every

Correct AnswerverifiedShow Answer

Suppose you will receive $500 at some point in the future.If the annual interest rate is 7.5 percent,then the present value of the $500 is

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

Which of the following is correct concerning stock market irrationality?

Correct AnswerverifiedShow Answer

If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?

Correct AnswerverifiedShow Answer

A person with diminishing marginal utility of wealth is risk averse.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

What is the present value of a payment of $100 to be made one year from today if the interest rate is 5 percent?

Correct AnswerverifiedShow Answer

Phillip is a mortgage broker,who is paid by commission.When interest rates decline,he does a lot of business and earns a lot of money,as more people buy houses or refinance their mortgages.But when interest rates rise,business falls substantially.To diversify,Phillip should choose investments that

Correct AnswerverifiedShow Answer

Diversification can reduce firm-specific risk.

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

Which of the following is not correct?

Correct AnswerverifiedShow Answer

Figure 19-4.The figure shows a utility function for Dexter. -Refer to Figure 19-4.Suppose Dexter begins with $1,300 in wealth.Starting from there,

Correct AnswerverifiedShow Answer

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