Question 1

The possibility of speculative bubbles in the stock market arises in part because

Accepted Answer

A)   stock prices may not depend at all on psychological factors.
B)   fundamental analysis may be the correct way to evaluate the value of stocks.
C)   future streams of dividend payments are very hard to estimate.
D)   the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.E) A) and D)
F) A) and C)

Question 2

If Alan is risk-averse, then he will always

Accepted Answer

A)   choose not to play a game where he has a 50 percent chance of winning $5 and a 50 percent chance of losing $5.
B)   choose not to play a game where he has a 75 percent chance of winning $5 and a 25 percent chance of losing $5.
C)   choose to play a game where he has a 55 percent chance of winning $5 and a 45 percent chance of losing $5.
D)   All of the above are correct.E) B) and D)
F) A) and D)

Question 3

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Accepted Answer

A)   4 years
B)   5 years
C)   6 years
D)   7 yearsE) All of the above
F) A) and D)

Question 4

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

Accepted Answer

A)   2 percent
B)   3 percent
C)   4 percent
D)   5 percentE) B) and C)
F) A) and B)

Question 5

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   7 percentE) All of the above
F) C) and D)

Question 6

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Accepted Answer

A)   $725.62. It would be higher if the interest rate were higher.
B)   $727.28. It would be higher if the interest rate were higher.
C)   $725.62. It would be lower if the interest rate were higher.
D)   $727.28. It would be lower if the interest rate were higher.E) All of the above
F) A) and D)

Question 7

Most financial decisions involve two related elements:

Accepted Answer

A)   advice and consent.
B)   investment and taxes.
C)   time and risk.
D)   saving and consumption.E) B) and D)
F) C) and D)

Question 8

In effect, an annuity provides insurance

Accepted Answer

A)   against the risk of dying and leaving one's family without a regular income.
B)   against the risk of living too long.
C)   to people who are not risk-averse.
D)   to people whose utility functions do not display the usual properties.E) B) and C)
F) A) and D)

Question 9

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)   Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO.
B)   Simpson announces that its profits were low, but not as low as the market had expected.
C)   Analysis by a column in a business weekly indicates that Simpson is overvalued.
D)   All of the above would increase the price.E) None of the above
F) B) and D)

Question 10

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Accepted Answer

The future...

Question 11

By diversifying, the risk of holding stock

Accepted Answer

A)   can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
B)   can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.
C)   can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
D)   can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.E) A) and D)
F) None of the above

Question 12

Which of the following defines an annuity?

Accepted Answer

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) C) and D)
F) None of the above

Question 13

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 14

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Accepted Answer

A)   fundamental analysis is an efficient way to go about choosing which stocks to buy or sell.
B)   stock prices move upward and downward "efficiently," rather than following a "random walk."
C)   the stock market is "informationally efficient."
D)   companies employ officers and managers who are well-qualified to perform their jobs.E) B) and C)
F) None of the above

Question 15

If the efficient market hypothesis is correct, then

Accepted Answer

A)   index funds should typically beat managed funds, and usually do.
B)   index fund should typically beat managed funds, but usually do not.
C)   mutual funds should typically beat index funds, and usually do.
D)   mutual funds should typically beat index funds, but usually do not.E) A) and D)
F) A) and C)

Question 16

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Accepted Answer

A)   rise, and investment spending rise.
B)   rise, and investment spending fall.
C)   fall, and investment spending rise.
D)   fall, and investment spending fall.E) A) and D)
F) B) and C)

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)   701 + r) /r years.E) A) and B)
F) A) and C)

Question 18

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A)   $240.38
B)   $242.24
C)   $244.40
D)   None of the above are correct to the nearest cent.E) All of the above
F) B) and C)

Question 19

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) None of the above
F) All of the above

Question 20

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A)   5
B)   6
C)   8
D)   9E) A) and D)
F) A) and C)

Exam 14: The Basic Tools of Finance

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Correct AnswerverifiedShow Answer

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

Correct AnswerverifiedShow Answer

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Correct AnswerverifiedShow Answer

Which of the following defines an annuity?

Correct AnswerverifiedShow Answer

In effect, an annuity provides insurance

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 Alan is risk-averse, then he will always

Correct AnswerverifiedShow Answer

Most financial decisions involve two related elements:

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Correct AnswerverifiedShow Answer

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Correct AnswerverifiedShow Answer

The possibility of speculative bubbles in the stock market arises in part because

Correct AnswerverifiedShow Answer

By diversifying, the risk of holding stock

Correct AnswerverifiedShow Answer

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Correct AnswerverifiedShow Answer

If the efficient market hypothesis is correct, then

Correct AnswerverifiedShow Answer

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Correct AnswerverifiedShow Answer

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Correct AnswerverifiedThe future...View AnswerShow Answer

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

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

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Correct AnswerverifiedShow Answer

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Correct AnswerverifiedShow Answer

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The future...
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