Question 1

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?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   Option DE) B) and C)
F) None of the above

Question 2

Which of the following is correct if the interest rate is 6 percent?

Accepted Answer

A)   $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400.
B)   $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400.
C)   $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400.
D)   $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.E) C) and D)
F) A) and C)

Question 3

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Accepted Answer

A)   firm­specific risk, which will likely raise shareholders' demand for higher return.
B)   firm­specific risk, which will likely not likely raise shareholders' demand for higher return.
C)   market risk, which will likely raise shareholders' demand for higher return.
D)   market risk, which will likely not raise shareholders' demand for higher return.E) C) and D)
F) None of the above

Question 4

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?

Accepted Answer

A)   $4
B)   $8
C)   $16
D)   $32E) A) and C)
F) None of the above

Question 5

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Accepted Answer

A)   rises. The company is more likely to buy the equipment.
B)   rises. The company is less likely to buy the equipment.
C)   falls. The company is more likely to buy the equipment.
D)   falls. The company is less likely to buy the equipment.E) A) and C)
F) None of the above

Question 6

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Accepted Answer

A)   $1,160.00
B)   $1,166.40
C)   $1,168.65
D)   $1,169.64E) C) and D)
F) A) and C)

Question 7

Write the formula for finding the future value in n years of $x today.

Accepted Answer

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

Question 8

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Accepted Answer

A)   both Irene's and Victor's
B)   Irene's but not Victor's
C)   Victor's but not Irene's
D)   neither Victor's nor Irene'sE) C) and D)
F) A) and D)

Question 9

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Accepted Answer

A)   These are both examples of adverse selection.
B)   These are both examples of moral hazard.
C)   The first example illustrates adverse selection, and the second illustrates moral hazard.
D)   The first example illustrates moral hazard, and the second illustrates adverse selection.E) C) and D)
F) A) and C)

Question 10

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)   overvalued, so its price would rise.
B)   overvalued, so its price would fall.
C)   undervalued, so its price would rise.
D)   undervalued, so its price would fall.E) C) and D)
F) All of the above

Question 11

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 12

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Accepted Answer

A)   4
B)   5
C)   6
D)   7E) C) and D)
F) A) and C)

Question 13

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu...

Question 14

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

Question 15

If a person is risk averse, then she has

Accepted Answer

A)   diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
B)   diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.
C)   increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
D)   increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.E) A) and B)
F) A) and C)

Question 16

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   None of the above would give a present value within a cent of $162.24.E) B) and D)
F) All of the above

Question 17

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A)   3 percent.
B)   4 percent.
C)   5 percent.
D)   None of the above is correct.E) A) and D)
F) B) and D)

Question 18

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A)   The insurance requirement and the credit check are both designed primarily to reduce adverse selection.
B)   The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard.
C)   The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard.
D)   The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection.E) B) and C)
F) None of the above

Question 19

The utility function of a risk-averse person has a

Accepted Answer

A)   positive slope and gets steeper as wealth increases.
B)   positive slope but gets flatter as wealth increases.
C)   negative slope but gets steeper as wealth increases.
D)   negative slope and gets flatter as wealth increases.E) C) and D)
F) None of the above

Question 20

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 lowest present value today?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   Option DE) All of the above
F) A) and D)

Exam 27: The Basic Tools of Finance

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Correct Answer
verified

The utility function of a risk-averse person has a

Correct Answer
verified

Write the formula for finding the future value in n years of $x today.

Correct Answer
verified

Correct Answer
verified

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Correct Answer
verified

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Correct Answer
verified

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Correct Answer
verified

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Correct Answer
verified

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

Correct Answer
verified

If a person is risk averse, then she has

Correct Answer
verified

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Correct Answer
verified
Bill's behavior illu...
View Answer

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Correct Answer
verified

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?

Correct Answer
verified

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Correct Answer
verified

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Correct Answer
verified

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

Correct Answer
verified

Which of the following is correct if the interest rate is 6 percent?

Correct Answer
verified

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Correct Answer
verified

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 lowest present value today?

Correct Answer
verified

Exam 27: The Basic Tools of Finance

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Correct AnswerverifiedShow Answer

The utility function of a risk-averse person has a

Correct AnswerverifiedShow Answer

Write the formula for finding the future value in n years of $x today.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Correct AnswerverifiedShow Answer

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Correct AnswerverifiedShow Answer

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Correct AnswerverifiedShow Answer

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If a person is risk averse, then she has

Correct AnswerverifiedShow Answer

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Correct AnswerverifiedBill's behavior illu...View AnswerShow Answer

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Correct AnswerverifiedShow Answer

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

Correct AnswerverifiedShow Answer

Which of the following is correct if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Correct AnswerverifiedShow Answer

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 lowest present value today?

Correct AnswerverifiedShow Answer

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Bill's behavior illu...
View Answer

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