Question 1

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   7 percentE) A) and B)
F) A) and C)

Question 2

Which of the following changes would increase the present value of a future payment?

Accepted Answer

A)   an increase in the size of the payment
B)   an increase in the time until the payment is made
C)   an increase in the interest rate
D)   All of the above are correct.E) None of the above
F) A) and B)

Question 3

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Accepted Answer

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

Question 4

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Accepted Answer

A)   market risk.
B)   moral hazard.
C)   adverse selection.
D)   risk aversion.E) A) and B)
F) B) and C)

Question 5

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

Question 6

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Accepted Answer

A)   every risk-averse person will earn a higher rate of return than every non-risk-averse person.
B)   every risk-averse person will earn a lower rate of return than every non-risk-averse person.
C)   the average risk-averse person will earn a higher rate of return than the average non-risk-averse person.
D)   the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.E) A) and C)
F) All of the above

Question 7

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) A) and C)

Question 8

If the efficient markets hypothesis is correct, then

Accepted Answer

A)   the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy.
B)   the stock market is informationally efficient.
C)   stock prices never follow a random walk.
D)   All of the above are correct.E) A) and D)
F) A) and C)

Question 9

George puts $200 into an account when the interest rate is 8 percent. Later he checks his balance and finds that he has a balance of about $272.10. How many years did he wait to check his balance?

Accepted Answer

A)   3 years
B)   3.5 years
C)   4 years
D)   4.5 yearsE) All of the above
F) C) and D)

Question 10

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Accepted Answer

A)   5 years
B)   6 years
C)   7 years
D)   8 yearsE) B) and D)
F) B) and C)

Question 11

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Accepted Answer

A) True 
 B)False

Question 12

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

Accepted Answer

A)   This stock is overvalued; you should consider adding it to your portfolio.
B)   This stock is overvalued; you shouldn't consider adding it to your portfolio.
C)   This stock is undervalued; you should consider adding it to your portfolio.
D)   This stock is undervalued; you shouldn't consider adding it to your portfolio.E) A) and B)
F) None of the above

Question 13

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A)   4 percent.
B)   6 percent.
C)   8 percent.
D)   All of the above are correct.E) None of the above
F) All of the above

Question 14

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Accepted Answer

A)   $240 paid in three years
B)   $225 paid in two years
C)   $210 paid in one year
D)   $200 todayE) A) and B)
F) A) and C)

Question 15

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Accepted Answer

A) True 
 B)False

Question 16

An index fund

Accepted Answer

A)   holds only stocks and bonds that are indexed to inflation.
B)   holds all the stocks in a given stock index.
C)   guarantees a return that follows the index of leading economic indicators.
D)   typically has a lower return than a managed fund.E) A) and B)
F) All of the above

Question 17

Other things the same, as the number of stocks in a portfolio rises,

Accepted Answer

A)   risk increases and the standard deviation of the return rises.
B)   risk increases and the standard deviation of the return falls.
C)   risk decreases and the standard deviation of the return rises.
D)   risk decreases and the standard deviation of the return falls.E) A) and C)
F) A) and B)

Question 18

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Accepted Answer

A)   $972.00
B)   $973.44
C)   $974.19
D)   None of the above is correct.E) A) and B)
F) All of the above

Question 19

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A)   For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent.
B)   For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent.
C)   For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent.
D)   For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.E) B) and C)
F) All of the above

Question 20

Eloise deposits $250 into an account and one year later has $272.50. What interest rate was paid on Eloise's deposit?

Accepted Answer

A)   8 percent
B)   9 percent
C)   10 percent
D)   None of the above is correct.E) All of the above
F) None of the above

Exam 9: The Basic Tools of Finance

Which of the following changes would increase the present value of a future payment?

Correct AnswerverifiedShow Answer

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Correct AnswerverifiedShow Answer

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Correct AnswerverifiedShow Answer

Most financial decisions involve two related elements:

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Correct AnswerverifiedShow Answer

If you deposit $900 into an account for two years and the interest rate is 4%, how much do you have at the end of the two years?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $79.50 one year from today equal to $75 today?

Correct AnswerverifiedShow Answer

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Correct AnswerverifiedShow Answer

An index fund

Correct AnswerverifiedShow Answer

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

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

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Correct AnswerverifiedShow Answer

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

Correct AnswerverifiedShow Answer

Other things the same, as the number of stocks in a portfolio rises,

Correct AnswerverifiedShow Answer

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

If the efficient markets hypothesis is correct, then

Correct AnswerverifiedShow Answer

George puts $200 into an account when the interest rate is 8 percent. Later he checks his balance and finds that he has a balance of about $272.10. How many years did he wait to check his balance?

Correct AnswerverifiedShow Answer

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Correct AnswerverifiedShow Answer

Eloise deposits $250 into an account and one year later has $272.50. What interest rate was paid on Eloise's deposit?

Correct AnswerverifiedShow Answer

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