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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


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 C)
F) None of the above

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The risk of a portfolio


A) increases as the number of stocks in the portfolio increases.
B) is usually measured using a statistic called the standard diversification.
C) is positively related to the average return of the portfolio.
D) bears no relationship to the average return of the portfolio.

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

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Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of FineLine Corporation Stock fall?


A) both the interest rate rising and the revenue announcement
B) neither the interest rate rising nor the revenue announcement
C) only the interest rate rising
D) only the revenue announcement

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

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

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Suppose the interest rate is 8 percent. Consider three payment options: 1) $200 today. 2) $220 one year from today. "3) $240 two years from today. Which of the following is correct?"


A) Option 1 has the highest present value and Option 2 has the lowest.
B) Option 2 has the highest present value and Option 3 has the lowest.
C) Option 3 has the highest present value and Option 1 has the lowest.
D) None of the above is correct.

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

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What is meant by an asset bubble?

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The price of an asse...

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Which of the following is not correct?


A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks.
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds.
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions.
D) If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis.

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

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HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project


A) is now lower than it was before, and so Hydro Grow is less likely to build the building.
B) is now lower than it was before, and so HydroGrow is more likely to build the building.
C) is now higher than it was before, and so HydroGrow is less likely to build the building.
D) is now higher than it was before, and so HydroGrow is more likely to build the building.

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

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A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?


A) 7 percent
B) 8 percent
C) 9 percent
D) 10 percent

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

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Greg's Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first year, $4 million the second year and have no value thereafter. Greg's Tasty Ice Cream should build the factory if the interest rate is


A) 3% but not if it is 4%.
B) 4% but not if it is 5%.
C) 5% but not if it is 6%.
D) 6% but not if it is 7%.

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

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Matt's Utility Function Matt's Utility Function If Matt's current wealth is $51,000, then A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse. If Matt's current wealth is $51,000, then


A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse.
B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse.
C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse.
D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse.

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

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What is the present value of a payment of $1,000 two years from now if the interest rate is 6%?


A) $2,000/1.06
B) $1000/1.06) 2
C) $1000/1 + 0.062)
D) None of the above are correct.

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

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Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?


A) Al
B) Ralph
C) Stan
D) They all retire with the same amount.

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

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The future value of $500 saved for two years at an interest rate of 5% is


A) $550.25.
B) $550.00.
C) $551.25.
D) None of the above are correct.

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

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Which of the following defines an annuity?


A) For a fee, an insurance company provides you with regular income until you die.
B) A surcharge is added to life-insurance premiums paid by persons in dangerous occupations.
C) Annuity is another name for stock funds managed by mutual fund managers.
D) Annuity is another name for any diversified portfolio.

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

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Which of the following is not correct?


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

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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 B)
F) A) and C)

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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?.


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 D)
F) B) and C)

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People who hold well-diversified portfolios of stocks have greatly reduced or eliminated


A) firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
B) market risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
C) firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions.
D) market risk, but still they have reason to worry about their wealth decreasing as a result of recessions.

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

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The concept of present value helps explain why


A) investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
B) investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases.
C) the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases.
D) None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

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

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