Question 1

Value of a loan amount X with interest r after one period equals:

Accepted Answer

A)   (X * 1) /(X * r) 
B)   X * (1 + r) 
C)   X/(1 + r) 
D)   All of these are true.E) C) and D)
F) None of the above

Question 2

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

Accepted Answer

A)   $1,120,262
B)   $1,188,758
C)   $1,201,204
D)   $1,176,224E) A) and B)
F) A) and C)

Question 3

Expected value is:

Accepted Answer

A)   the average of each possible outcome of a future event, weighted by its probability of occurring.
B)   the average probability of all possible outcomes of a future event occurring, weighted by each possible outcome individually.
C)   the sum of all probabilities of all possible outcomes of a future event occurring.
D)   None of these statements is true.E) B) and C)
F) All of the above

Question 4

The two big problems facing insurance companies in trying to manage risk are:

Accepted Answer

A)   risk pooling and diversification.
B)   risk pooling and adverse selection.
C)   adverse selection and moral hazard.
D)   moral hazard and diversification.E) A) and D)
F) A) and B)

Question 5

Compounding:

Accepted Answer

A)   is beneficial to savers, but costly to borrowers.
B)   is beneficial to borrowers, but costly to savers.
C)   is beneficial to borrowers and savers alike.
D)   is costly to both borrowers and savers.E) All of the above
F) None of the above

Question 6

In making decisions about insurance:

Accepted Answer

A)   using hindsight is the only way to truly know what the right decision was.
B)   you must consider it in light of the best information available at the time.
C)   you need to weigh the cost of the insurance against the benefit of payouts over the life of the contract.
D)   None of these statements is true.E) None of the above
F) C) and D)

Question 7

Those who generally have low willingness to take on risk are said to be:

Accepted Answer

A)   risk-seekers.
B)   risk-averse.
C)   low-risk players.
D)   high-compensation players.E) C) and D)
F) B) and D)

Question 8

A risk-seeker is likely to:

Accepted Answer

A)   buy a government bond instead of a stock.
B)   put money in a savings account instead of investing in a start-up company.
C)   invest in a start-up company instead of putting his money under his mattress.
D)   put his money under his mattress instead of buying company stock.E) B) and C)
F) C) and D)

Question 9

Diversification involves:

Accepted Answer

A)   investing all your money in one company.
B)   buying only one kind of stock.
C)   buying only low-risk bonds.
D)   None of these statements is true.E) None of the above
F) A) and B)

Question 10

The foundational principle that makes insurance companies work is called:

Accepted Answer

A)   risk pooling.
B)   risk assignment.
C)   catastrophic causation.
D)   risk analysis.E) C) and D)
F) A) and B)

Question 11

The present value of $250,000 in 10 years at 2 percent interest is approximately:

Accepted Answer

A)   $205,087.
B)   $212,051.
C)   $305,194.
D)   $195,085.E) B) and C)
F) None of the above

Question 12

The process of accumulation that occurs when interest is paid on previously earned interest is called:

Accepted Answer

A)   present valuation.
B)   backdating.
C)   compounding.
D)   front loading.E) A) and D)
F) B) and C)

Question 13

Present value is:

Accepted Answer

A)   how much a certain amount of money that will be obtained in the future is worth today.
B)   how much a certain amount of money that you have in the present will be worth in the future.
C)   the process of accumulation of additional interest paid on interest that has already been earned.
D)   how much a certain amount of money needs to be discounted to be meaningful.E) A) and B)
F) A) and C)

Question 14

The value of a loan of $100,000 after a year at 5 percent interest is:

Accepted Answer

A)   $5,000.
B)   $95,000.
C)   $105,000.
D)   None of these is true.E) All of the above
F) B) and D)

Question 15

Different banks:

Accepted Answer

A)   may offer loans at different rates.
B)   all offer loans at the same interest rate.
C)   are mandated to follow the Fed's set interest rate.
D)   never offer loans at exactly the same rates.E) A) and B)
F) All of the above

Question 16

The key to diversification is that the risks should be:

Accepted Answer

A)   positively correlated.
B)   uncorrelated.
C)   negatively correlated.
D)   easy to reduce.E) A) and B)
F) A) and D)

Question 17

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

Accepted Answer

A)   the trade-off between future value and expected value.
B)   the opportunity cost of the risk involved.
C)   the trade-off between risk and expected value.
D)   the opportunity cost of the expected value.E) A) and B)
F) A) and C)

Question 18

The interest rate you typically earn on a deposit at a bank:

Accepted Answer

A)   represents the price of your loan.
B)   represents the risk of investing.
C)   is the opportunity cost to you of lending money.
D)   is the opportunity cost to a bank of lending money.E) A) and B)
F) A) and C)

Question 19

Which of the following decisions are complicated by the value of money changing over time?

Accepted Answer

A)   Buying a $100 concert ticket
B)   Buying a $100 stock
C)   Buying a $100 sweater
D)   Buying a $100 blenderE) A) and B)
F) A) and C)

Question 20

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.What is the expected value of the payoff in the first game?

Accepted Answer

A)   $5.75
B)   $5.00
C)   $4.75
D)   $4.50E) B) and D)
F) A) and B)

Exam 11: Time and Uncertainty

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

Correct Answer
verified

In making decisions about insurance:

Correct Answer
verified

The key to diversification is that the risks should be:

Correct Answer
verified

The value of a loan of $100,000 after a year at 5 percent interest is:

Correct Answer
verified

The two big problems facing insurance companies in trying to manage risk are:

Correct Answer
verified

Compounding:

Correct Answer
verified

The foundational principle that makes insurance companies work is called:

Correct Answer
verified

Correct Answer
verified

The present value of $250,000 in 10 years at 2 percent interest is approximately:

Correct Answer
verified

Those who generally have low willingness to take on risk are said to be:

Correct Answer
verified

A risk-seeker is likely to:

Correct Answer
verified

Expected value is:

Correct Answer
verified

Which of the following decisions are complicated by the value of money changing over time?

Correct Answer
verified

Value of a loan amount X with interest r after one period equals:

Correct Answer
verified

Different banks:

Correct Answer
verified

Present value is:

Correct Answer
verified

Diversification involves:

Correct Answer
verified

The interest rate you typically earn on a deposit at a bank:

Correct Answer
verified

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

Correct Answer
verified

The process of accumulation that occurs when interest is paid on previously earned interest is called:

Correct Answer
verified

Exam 11: Time and Uncertainty

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

Correct AnswerverifiedShow Answer

In making decisions about insurance:

Correct AnswerverifiedShow Answer

The key to diversification is that the risks should be:

Correct AnswerverifiedShow Answer

The value of a loan of $100,000 after a year at 5 percent interest is:

Correct AnswerverifiedShow Answer

The two big problems facing insurance companies in trying to manage risk are:

Correct AnswerverifiedShow Answer

Compounding:

Correct AnswerverifiedShow Answer

The foundational principle that makes insurance companies work is called:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The present value of $250,000 in 10 years at 2 percent interest is approximately:

Correct AnswerverifiedShow Answer

Those who generally have low willingness to take on risk are said to be:

Correct AnswerverifiedShow Answer

A risk-seeker is likely to:

Correct AnswerverifiedShow Answer

Expected value is:

Correct AnswerverifiedShow Answer

Which of the following decisions are complicated by the value of money changing over time?

Correct AnswerverifiedShow Answer

Value of a loan amount X with interest r after one period equals:

Correct AnswerverifiedShow Answer

Different banks:

Correct AnswerverifiedShow Answer

Present value is:

Correct AnswerverifiedShow Answer

Diversification involves:

Correct AnswerverifiedShow Answer

The interest rate you typically earn on a deposit at a bank:

Correct AnswerverifiedShow Answer

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

Correct AnswerverifiedShow Answer

The process of accumulation that occurs when interest is paid on previously earned interest is called:

Correct AnswerverifiedShow Answer

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