Question 1

Sage decides to cash in all his savings to open a recording studio.He has three accounts to cash in.The first earned 9 percent for two years.The second earned 6 percent for three years.And the last earned 3 percent for six years.Supposing he started with $5,000 in each account,from which account will he get the most cash?

Accepted Answer

A)   the two-year account at 9 percent
B)   the three-year account at 6 percent
C)   the six-year account at 3 percent
D)   The accounts are all worth the same.E) None of the above
F) B) and D)

Question 2

If you are convinced that stock prices are impossible to predict from available information,then you probably also believe that

Accepted Answer

A)   the efficient markets hypothesis is not a correct hypothesis.
B)   the stock market is informationally efficient.
C)   the stock market is informationally inefficient.
D)   there is no reason to establish a diversified portfolio of stocks.E) B) and C)
F) All of the above

Question 3

Suppose you put $500 into a bank account today.Interest is paid annually and the annual interest rate is 5.5 percent.The future value of the $500 is

Accepted Answer

A)   $637.50 after 5 years and $822.09 after 10 years.
B)   $637.50 after 5 years and $775.00 after 10 years.
C)   $653.48 after 5 years and $854.07 after 10 years.
D)   $688.36 after 5 years and $915.56 after 10 years.E) A) and D)
F) All of the above

Question 4

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 5

In the late 1990s,Fed Chair Alan Greenspan believed that the market was

Accepted Answer

A)   undervalued,and evidence later showed that this was clearly correct.
B)   undervalued,but whether it was remains debatable.
C)   overvalued,and evidence later showed that this was clearly correct.
D)   overvalued,but whether it was remains debatable.E) None of the above
F) A) and B)

Question 6

Which of the following best illustrates diversification?

Accepted Answer

A)   A company that produces many different products decides to produce fewer.
B)   After selling stock,corporate management spends funds on projects with greater risks than shareholders had anticipated.
C)   Instead of holding only the stocks of companies engaged in the banking business,a person decides to hold stock in a number of different companies producing different goods and services.
D)   A person decides to purchase only stocks that have paid high dividends in the past.E) B) and C)
F) B) and D)

Question 7

According to fundamental analysis,when choosing stocks for your portfolio,you should prefer undervalued stocks.

Accepted Answer

A) True 
 B)False

Question 8

Suppose you are deciding whether or not to buy a particular bond for $2,990.08.If you buy the bond and hold it for 5 years,then at that time you will receive a payment of $5,000.You will buy the bond today if the interest rate is

Accepted Answer

A)   no less than 9.48 percent.
B)   no greater than 9.48 percent.
C)   no less than 10.83 percent.
D)   no greater than 10.83 percent.E) A) and B)
F) All of the above

Question 9

Sometimes On Time (SOT) Airlines is considering buying a new jet.SOT would be more likely to buy a new jet if there were either

Accepted Answer

A)   a decrease in the price of a new jet or a decrease in the interest rate.
B)   a decrease in the price of a new jet or an increase in the interest rate.
C)   an increase in the price of a new jet or a decrease in the interest rate.
D)   an increase in the price of a new jet or an increase in the interest rate.E) None of the above
F) A) and B)

Question 10

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

Accepted Answer

A)   $500/(1.04) 2
B)   $500 - 500(1.04) 2
C)   $500 - $500/(.04) 2
D)   None of the above is correct.E) A) and D)
F) All of the above

Question 11

Annie knows that people in her family die young,and so she buys life insurance.Harry 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) None of the above
F) A) and C)

Question 12

If a person is risk averse,then she has

Accepted Answer

A)   diminishing marginal utility of wealth,implying that her utility function gets flatter as wealth increases.
B)   diminishing marginal utility of wealth,implying that her utility function gets steeper as wealth increases.
C)   increasing marginal utility of wealth,implying that her utility function gets flatter as wealth increases.
D)   increasing marginal utility of wealth,implying that her utility function gets steeper as wealth increases.E) A) and D)
F) A) and C)

Question 13

At an annual interest rate of 14 percent,about how many years will it take $100 to double in value?

Accepted Answer

A)   3
B)   4
C)   5
D)   7E) All of the above
F) B) and C)

Question 14

You have a contract with someone who has agreed to pay you $20,000 in four years.She offers to pay you now instead.For which of the following interest rates and payments would you take the money today?.

Accepted Answer

A)   8 percent,$15,000
B)   7 percent,$16,000
C)   6 percent,$17,000
D)   All of the above are correct.E) A) and B)
F) None of the above

Question 15

Sally buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Edward buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Sally

Accepted Answer

A)   and the example with Edward illustrate adverse selection.
B)   and the example with Sally illustrate moral hazard.
C)   illustrates adverse selection;the example with Edward illustrates moral hazard.
D)   illustrates moral hazard;the example with Edward illustrates adverse selection.E) A) and D)
F) B) and C)

Question 16

According to the rule of 70,if the interest rate is 5 percent,how long will it take for the value of a savings account to double?

Accepted Answer

A)   about 3.5 years
B)   about 6.3 years
C)   about 12 years
D)   about 14 yearsE) All of the above
F) C) and D)

Question 17

Which of the following is the largest?

Accepted Answer

A)   the future value of $250 with 3% interest for 2 years
B)   the future value of $250 at 2% interest for 3 years
C)   the present value of $250 to be paid in two years when the interest rate is 3%
D)   the present value of $250 to be paid in three years when the interest rate is 2%E) A) and B)
F) A) and D)

Question 18

You put $275 in the bank one year ago and forgot about it.The bank sends you a notice that you now have $291.50 in your account.What interest rate did you earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) A) and C)
F) A) and B)

Question 19

Which of the following actions best illustrates moral hazard?

Accepted Answer

A)   A person adds risky stock to his portfolio.
B)   A person who has narrowly avoided many accidents applies for automobile insurance.
C)   A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)   A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.E) None of the above
F) B) and D)

Question 20

Albert Einstein once referred to compounding as

Accepted Answer

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

Exam 27: The Basic Tools of Finance

The market for insurance is an example of diversification.

Correct Answer
verified

If a person is risk averse,then she has

Correct Answer
verified

Suppose you are deciding whether or not to buy a particular bond for $2,990.08.If you buy the bond and hold it for 5 years,then at that time you will receive a payment of $5,000.You will buy the bond today if the interest rate is

Correct Answer
verified

Suppose you put $500 into a bank account today.Interest is paid annually and the annual interest rate is 5.5 percent.The future value of the $500 is

Correct Answer
verified

According to the rule of 70,if the interest rate is 5 percent,how long will it take for the value of a savings account to double?

Correct Answer
verified

According to fundamental analysis,when choosing stocks for your portfolio,you should prefer undervalued stocks.

Correct Answer
verified

At an annual interest rate of 14 percent,about how many years will it take $100 to double in value?

Correct Answer
verified

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

Correct Answer
verified

Which of the following is the largest?

Correct Answer
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Correct Answer
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Albert Einstein once referred to compounding as

Correct Answer
verified

Which of the following best illustrates diversification?

Correct Answer
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Which of the following actions best illustrates moral hazard?

Correct Answer
verified

In the late 1990s,Fed Chair Alan Greenspan believed that the market was

Correct Answer
verified

Sometimes On Time (SOT) Airlines is considering buying a new jet.SOT would be more likely to buy a new jet if there were either

Correct Answer
verified

Sally buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Edward buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Sally

Correct Answer
verified

You have a contract with someone who has agreed to pay you $20,000 in four years.She offers to pay you now instead.For which of the following interest rates and payments would you take the money today?.

Correct Answer
verified

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

Correct Answer
verified

You put $275 in the bank one year ago and forgot about it.The bank sends you a notice that you now have $291.50 in your account.What interest rate did you earn?

Correct Answer
verified

If you are convinced that stock prices are impossible to predict from available information,then you probably also believe that

Correct Answer
verified

Exam 27: The Basic Tools of Finance

The market for insurance is an example of diversification.

Correct AnswerverifiedShow Answer

If a person is risk averse,then she has

Correct AnswerverifiedShow Answer

Suppose you are deciding whether or not to buy a particular bond for $2,990.08.If you buy the bond and hold it for 5 years,then at that time you will receive a payment of $5,000.You will buy the bond today if the interest rate is

Correct AnswerverifiedShow Answer

Suppose you put $500 into a bank account today.Interest is paid annually and the annual interest rate is 5.5 percent.The future value of the $500 is

Correct AnswerverifiedShow Answer

According to the rule of 70,if the interest rate is 5 percent,how long will it take for the value of a savings account to double?

Correct AnswerverifiedShow Answer

According to fundamental analysis,when choosing stocks for your portfolio,you should prefer undervalued stocks.

Correct AnswerverifiedShow Answer

At an annual interest rate of 14 percent,about how many years will it take $100 to double in value?

Correct AnswerverifiedShow Answer

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

Correct AnswerverifiedShow Answer

Which of the following is the largest?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Albert Einstein once referred to compounding as

Correct AnswerverifiedShow Answer

Which of the following best illustrates diversification?

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates moral hazard?

Correct AnswerverifiedShow Answer

In the late 1990s,Fed Chair Alan Greenspan believed that the market was

Correct AnswerverifiedShow Answer

Sometimes On Time (SOT) Airlines is considering buying a new jet.SOT would be more likely to buy a new jet if there were either

Correct AnswerverifiedShow Answer

Sally buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company.Edward buys home owners insurance and then is less careful to make sure he's put out his cigarettes.The example with Sally

Correct AnswerverifiedShow Answer

You have a contract with someone who has agreed to pay you $20,000 in four years.She offers to pay you now instead.For which of the following interest rates and payments would you take the money today?.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You put $275 in the bank one year ago and forgot about it.The bank sends you a notice that you now have $291.50 in your account.What interest rate did you earn?

Correct AnswerverifiedShow Answer

If you are convinced that stock prices are impossible to predict from available information,then you probably also believe that

Correct AnswerverifiedShow Answer

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