Question 1

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following changes would decrease 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)  a decrease in the interest rate
D)  All of the above are correct.E) A) and B)
F) None of the above

Question 3

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Accepted Answer

A)  $540.75
B)  $540.80
C)  $540.85
D)  None of the above are correct to the nearest cent.E) A) and C)
F) B) and C)

Question 4

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

Question 5

No particular stock is a better buy than any other stock if

Accepted Answer

A)  stock prices are driven by investors' "animal spirits."
B)  the random-walk theory of stock prices is incorrect.
C)  the efficient markets hypothesis is correct.
D)  actively managed mutual funds always outperform index funds.E) All of the above
F) B) and C)

Question 6

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

Question 7

According to fundamental analysis, a saver should prefer to buy stocks that are

Accepted Answer

A)  undervalued. This means the price of the stock is low given the value of the corporation.
B)  undervalued. This means the value of the corporation is low given the price of stock.
C)  overvalued. This means the price of the stock is high given the value of the corporation.
D)  overvalued. This means the value of the corporation is high given the price of stock.E) A) and B)
F) B) and C)

Question 8

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Accepted Answer

A)  is now lower than it was before, and so Hydro Grow is less likely to build the building.
B)  is now lower than it was before, and so HydroGrow is more likely to build the building.
C)  is now higher than it was before, and so HydroGrow is less likely to build the building.
D)  is now higher than it was before, and so HydroGrow is more likely to build the building.E) None of the above
F) A) and B)

Question 9

According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen's Leisure Company?

Accepted Answer

A)  Veblen announces, just as everyone had expected, that it has fired its CEO who has been accused of ethics violations.
B)  Veblen announces, as the market had expected, that its profits were low.
C)  Fundamental analysis published by KM Financial shows that Veblen's stock is undervalued.
D)  A highly anticipated book is published by a Veblen insider which details Veblen's innovative technology in plain English, information that was previously unavailable to the public and which will now be used by Veblen's competitors.E) B) and C)
F) A) and D)

Question 10

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Accepted Answer

A)  has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk.
B)  almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds.
C)  is spending his or her time wisely if the efficient markets hypothesis is correct.
D)  is interested in the likely ability of a corporation to pay dividends in the future.E) C) and D)
F) None of the above

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

Accepted Answer

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

Question 13

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?

Accepted Answer

A)  5 years
B)  6 years
C)  7 years
D)  8 yearsE) None of the above
F) A) and D)

Question 14

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
B)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.
C)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
D)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.E) None of the above
F) A) and B)

Question 15

The future value of a deposit in a savings account will be larger

Accepted Answer

A)  the longer a person waits to withdraw the funds.
B)  the higher the interest rate is.
C)  the larger the initial deposit is.
D)  All of the above are correct.E) All of the above
F) A) and D)

Question 16

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A)  80 to 100.
B)  40 to 80.
C)  10 to 20.
D)  1 to 10.E) A) and D)
F) None of the above

Question 17

Figure 27-3
The following figure shows the utility function for Paul. 
-Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Accepted Answer

A)  Paul would be willing to accept a coin-flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails."
B)  the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth.
C)  the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth.
D)  the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth.E) None of the above
F) A) and D)

Question 18

Which of the following games might a risk-averse person play?

Accepted Answer

A)  a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1
B)  a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100
C)  a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1
D)  a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1E) A) and C)
F) A) and D)

Question 19

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) All of the above

Question 20

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Accepted Answer

A)  $210
B)  $300
C)  $800
D)  $1,010E) A) and C)
F) A) and D)

Exam 27: Tools of Finance

Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Correct Answer
verified

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

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Correct Answer
verified

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Correct Answer
verified

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
verified

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.

Correct Answer
verified

Which of the following games might a risk-averse person play?

Correct Answer
verified

Correct Answer
verified

The future value of a deposit in a savings account will be larger

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

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Correct Answer
verified

According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen's Leisure Company?

Correct Answer
verified

According to fundamental analysis, a saver should prefer to buy stocks that are

Correct Answer
verified

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

Correct Answer
verified

No particular stock is a better buy than any other stock if

Correct Answer
verified

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Correct Answer
verified

Diversification

Correct Answer
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When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Correct Answer
verified

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?

Correct Answer
verified

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Correct Answer
verified

Exam 27: Tools of Finance

Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

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

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Correct AnswerverifiedShow Answer

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

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

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.

Correct AnswerverifiedShow Answer

Which of the following games might a risk-averse person play?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The future value of a deposit in a savings account will be larger

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

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen's Leisure Company?

Correct AnswerverifiedShow Answer

According to fundamental analysis, a saver should prefer to buy stocks that are

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

No particular stock is a better buy than any other stock if

Correct AnswerverifiedShow Answer

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Correct AnswerverifiedShow Answer

Diversification

Correct AnswerverifiedShow Answer

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Correct AnswerverifiedShow Answer

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