Question 1

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?.

Accepted Answer

A)   8 percent, $15,000
B)   7 percent, $16,000
C)   6 percent, $17,000
D)   All of the above are correct.E) C) and D)
F) A) and B)

Question 2

Stock market fluctuations

Accepted Answer

A)   often go hand in hand with fluctuations in the economy more broadly.
B)   rarely have anything to do with fluctuations in the economy more broadly.
C)   have few, if any, macroeconomic implications.
D)   are attributable to the widespread belief that the efficient markets hypothesis is correct.E) All of the above
F) B) and C)

Question 3

Risk

Accepted Answer

A)   can be reduced by placing a large number of small bets rather than a small number of large bets.
B)   can be reduced by increasing the number of stocks in a portfolio.
C)   Both A and B are correct.
D)   Neither A nor B are correct.E) A) and B)
F) A) and C)

Question 4

Suppose your bank account pays a 4% interest rate. You are considering purchasing a share of stock in ABC Corporation for $500. The stock will pay you a $10 dividend at the end of years 1, 2, and 3. You expect to be able to sell the stock at the end of year 3 for $550. Is ABC a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of the inves...

Question 5

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

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) A) and C)

Question 6

The rule of 70 applies to a growing savings account but not to a growing economy.

Accepted Answer

A) True 
 B)False

Question 7

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Accepted Answer

A)   $2,000/(1 + r) 2.
B)   $1,000 + $1,000/(1 + r) 
C)   $1,000/(1 + r)  + $1,000/(1 + r) 2
D)   $1,000(1 + r)  + $1,000(1 + r) 2E) None of the above
F) A) and B)

Question 8

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Accepted Answer

A)   $9,090.91
B)   $10,000.00
C)   $8,264.46
D)   $9,523.81E) None of the above
F) A) and D)

Question 9

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Accepted Answer

A) True 
 B)False

Question 10

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Accepted Answer

A)   4 percent
B)   6 percent
C)   9 percent
D)   11 percentE) All of the above
F) A) and C)

Question 11

Discuss the statistical evidence concerning the efficient markets hypothesis.

Accepted Answer

The evidence indicates that stock prices...

Question 12

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

A) True 
 B)False

Question 13

Some people claim that stocks follow a random walk. What does this mean?

Accepted Answer

A)   The price of stock one day is about what it was on the previous day.
B)   Changes in stock prices cannot be predicted from available information.
C)   Stock prices are not determined by market fundamentals such as supply and demand.
D)   Prices of stocks of different firms in the same industry show no or little tendency to move together.E) None of the above
F) B) and D)

Question 14

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Accepted Answer

A)   $4,531.52
B)   $4,878.52
C)   $5,124.50
D)   $5,516.91E) All of the above
F) B) and C)

Question 15

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Accepted Answer

A)   2 percent
B)   4 percent
C)   6 percent
D)   8 percentE) All of the above
F) C) and D)

Question 16

If Joanna is risk averse, then

Accepted Answer

A)   her utility function exhibits the property of decreasing utility.
B)   her utility function exhibits the property of increasing marginal utility.
C)   she dislikes bad things more than she likes comparable good things.
D)   she is unlike most people, because most people are not risk averse.E) C) and D)
F) A) and B)

Question 17

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Accepted Answer

The answer of Write the formula for finding the future...

Question 18

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

Accepted Answer

There are several possibilities. The fir...

Question 19

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

Question 20

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

Accepted Answer

A)   The first is lowest; the second is highest.
B)   The second is lowest; the third is highest.
C)   The third is lowest; the fourth is highest.
D)   The fourth is lowest; the first is highest.E) B) and C)
F) None of the above

Exam 27: The Basic Tools of Finance

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?.

Correct Answer
verified

Discuss the statistical evidence concerning the efficient markets hypothesis.

Correct Answer
verified
The evidence indicates that stock prices...
View Answer

Correct Answer
verified
The present value of the inves...
View Answer

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Correct Answer
verified

Stock market fluctuations

Correct Answer
verified

Risk

Correct Answer
verified

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Correct Answer
verified

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Correct Answer
verified

Which of the following defines an annuity?

Correct Answer
verified

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Correct Answer
verified

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Correct Answer
verified

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Correct Answer
verified

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Correct Answer
verified

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Correct Answer
verified

If Joanna is risk averse, then

Correct Answer
verified

Correct Answer
verified

The rule of 70 applies to a growing savings account but not to a growing economy.

Correct Answer
verified

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Correct Answer
verified

Some people claim that stocks follow a random walk. What does this mean?

Correct Answer
verified

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

Correct Answer
verified
There are several possibilities. The fir...
View Answer

Exam 27: The Basic Tools of Finance

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?.

Correct AnswerverifiedShow Answer

Discuss the statistical evidence concerning the efficient markets hypothesis.

Correct AnswerverifiedThe evidence indicates that stock prices...View AnswerShow Answer

Correct AnswerverifiedThe present value of the inves...View AnswerShow Answer

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Correct AnswerverifiedShow Answer

Stock market fluctuations

Correct AnswerverifiedShow Answer

Risk

Correct AnswerverifiedShow Answer

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Correct AnswerverifiedShow Answer

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Correct AnswerverifiedShow Answer

Which of the following defines an annuity?

Correct AnswerverifiedShow Answer

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Correct AnswerverifiedShow Answer

Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

Correct AnswerverifiedShow Answer

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Correct AnswerverifiedShow Answer

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Correct AnswerverifiedShow Answer

If Joanna is risk averse, then

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The rule of 70 applies to a growing savings account but not to a growing economy.

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 $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Correct AnswerverifiedShow Answer

Some people claim that stocks follow a random walk. What does this mean?

Correct AnswerverifiedShow Answer

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

Correct AnswerverifiedThere are several possibilities. The fir...View AnswerShow Answer

Correct Answer
verified

Correct Answer
verified
The evidence indicates that stock prices...
View Answer

Correct Answer
verified
The present value of the inves...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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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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
verified
There are several possibilities. The fir...
View Answer