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Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?


A) 2 percent
B) 4 percent
C) 6 percent
D) 8 percent

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

Correct Answer

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One way to characterize the difference between compounding and discounting is to say that


A) compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption.
B) discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption.
C) the process of compounding produces a future value, whereas the process of discounting produces a present value.
D) the process of compounding produces a present value, whereas the process of discounting produces a future value.

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

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You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,125 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,200 two years from today. In order for the same interest rate to apply to the two loans, X =


A) $1,853.55.
B) $1,898.70.
C) $1,948.79.
D) $2,012.22.

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

Correct Answer

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At which interest rate is the present value of $360 three years from today equal to about $310 today?


A) 4.7 percent
B) 5.1 percent
C) 5.5 percent
D) 5.9 percent

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

Correct Answer

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Which of the following statements best describes the economist's view of finance and the financial system?


A) The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.
B) The financial system, while interesting, is not very important to the functioning of the economy; however, the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.
C) The financial system is very important to the functioning of the economy; however, the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful.
D) The field of finance is intimately concerned with the financial system and the tools of finance, and financial economists see great importance in themΝΎ however, the "mainstream" economist sees little value in studying financial markets or the tools of finance.

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

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If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

A) True
B) False

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Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?


A) $X1 + rN) N
B) $X1 + r) N
C) $X1 + rN)
D) $X1 + r/N) N

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

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The future value of $1 saved today is $1/1 + r).

A) True
B) False

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According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?


A) 3.5
B) 7
C) 14
D) None of the above is correct.

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

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The value of a stock is based on the


A) present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise.
B) present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.
C) future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises.
D) future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.

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

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If stock prices follow a random walk, it means


A) long periods of declining prices are followed by long periods of rising prices.
B) the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day.
C) stock prices are unrelated to random events that shock the economy.
D) stock prices are just as likely to rise as to fall at any given time.

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

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When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?


A) 5 years
B) 6 years
C) 7 years
D) 8 years

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

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Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the highest present value today?


A) Option A
B) Option B
C) Option C
D) Option D

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

Correct Answer

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Scenario 27-1 Lisa has a utility function Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Is Lisa risk averse? Explain. where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Is Lisa risk averse? Explain.

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Yes, Lisa is risk averse. The ...

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You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?


A) Interest rates rise and you get the payment sooner.
B) Interest rates rise and you have to wait longer for the payment.
C) Interest rates fall and you get the payment sooner.
D) Interest rates fall and you have to wait longer to get the payment.

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

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Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is


A) a mutual fund.
B) an insurance company.
C) a diversified company.
D) an equity-financed company.

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

Correct Answer

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The efficient markets hypothesis implies


A) that all stocks are fairly valued all the time and that no stock is a better buy than any other.
B) that all stocks are fairly valued all the time, but that some stocks may be better buys than other.
C) that some stocks may be better buys than others and stock experts can determine which ones.
D) that no stock is efficiently valued.

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

Correct Answer

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If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

A) True
B) False

Correct Answer

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Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

A) True
B) False

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At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?


A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

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

Correct Answer

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