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Exam 27: The Basic Tools of Finance

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Question 31

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Diminishing marginal utility of wealth implies that the utility function

A) has increasing slope and a person is risk averse.
B) has increasing slope and a person is not risk averse.
C) has decreasing slope and a person is risk averse
D) has decreasing slope and a person is not risk averse.

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

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Question 32

Multiple Choice

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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 $10,000 or (2) two annual payments, each in the amount of $5,200, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the immediate payment of $10,000 if the interest rate is

A) 2 percent, but not if the interest rate is 1 percent.
B) 3 percent, but not if the interest rate is 2 percent.
C) 4 percent, but not if the interest rate is 3 percent.
D) 5 percent, but not if the interest rate is 4 percent.

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

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Question 33

Multiple Choice

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

The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

Diversification reduces

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

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain why

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

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

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?