Question 1

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Accepted Answer

A)   provide a higher return than the market average.
B)   provide a lower return than the market average.
C)   pay higher returns when interest rates rise and lower returns when interest rates fall.
D)   pay lower returns when interest rates rise and higher returns when interest rates fall.E) A) and D)
F) B) and C)

Question 2

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A)   $907.03 to be paid in two years
B)   $1,000.01 to be paid in two years
C)   $1,100.01 to be paid in two years
D)   $1,102.51 to be paid in two yearsE) All of the above
F) A) and B)

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

A)   $8,225.06.
B)   $7,920.94.
C)   $7,672.58.
D)   $6,998.98.E) B) and C)
F) A) and C)

Question 5

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

Accepted Answer

A)   to entice risk-loving people to become risk averse.
B)   to promote the phenomenon of adverse selection.
C)   not to eliminate the risks inherent in life, but to spread them around more efficiently.
D)   not to spread risks, but to eliminate them for individual policy holders.E) None of the above
F) B) and D)

Question 6

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Accepted Answer

A)   You receive the payment 3 years from now and the interest rate is 8 percent.
B)   You receive the payment 3 years from now and the interest rate is 6 percent.
C)   You receive the payment 2 years from now and the interest rate is 8 percent.
D)   You receive the payment 2 years from now and the interest rate is 6 percent.E) C) and D)
F) B) and D)

Question 7

An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer. It is widely believed that the presence of this individual will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?

Accepted Answer

A)   the announcement and the rise in interest rates
B)   the announcement but not the rise in interest rates
C)   the rise in interest rates, but not the announcement
D)   neither the announcement nor the rise in interest ratesE) A) and B)
F) B) and D)

Question 8

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A)   upward-sloping and has decreasing slope.
B)   upward-sloping and has increasing slope.
C)   downward-sloping and has decreasing slope.
D)   downward-sloping and has increasing slope.E) None of the above
F) All of the above

Question 9

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Accepted Answer

The reduct...

Question 10

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

Question 11

Economists disagree as to whether

Accepted Answer

A)   the stock price of a company should reflect the company's expected profitability.
B)   the basic tools of finance reflect valid ideas.
C)   stock prices reflect rational estimates of a company's true worth.
D)   there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.E) B) and D)
F) None of the above

Question 12

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

Question 13

Which of the following has the highest future value?

Accepted Answer

A)   $100 saved for 2 years at 10 percent interest
B)   $110 saved for 2 years at 9 percent interest
C)   $120 saved for 2 years at 8 percent interest
D)   $130 saved for 2 years at 7 percent interestE) A) and B)
F) A) and C)

Exam 14: The Basic Tools of Finance

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

Correct Answer
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Correct Answer
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Which of the following is the largest?

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

Correct Answer
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Economists disagree as to whether

Correct Answer
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Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Correct Answer
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At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Correct Answer
verified
The reduct...
View Answer

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

Correct Answer
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Which of the following has the highest future value?

Correct Answer
verified

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Correct Answer
verified

Correct Answer
verified

Diminishing marginal utility of wealth implies that the utility function 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

Exam 14: The Basic Tools of Finance

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is the largest?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Economists disagree as to whether

Correct AnswerverifiedShow Answer

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Correct AnswerverifiedShow Answer

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Correct AnswerverifiedThe reduct...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following has the highest future value?

Correct AnswerverifiedShow Answer

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Diminishing marginal utility of wealth implies that the utility function 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

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The reduct...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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