Question 1

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

Question 2

Lucky Hardware Store considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?

Accepted Answer

A)  Interest rates rise and the cost of building the store rises.
B)  Interest rates rise and the cost of building the store falls.
C)  Interest rates fall and the cost of building the store rises.
D)  Interest rates fall and the cost of building the store falls.E) B) and C)
F) A) and B)

Question 3

In general, as a person includes fewer stocks and more bonds in his portfolio,

Accepted Answer

A)  both risk and expected return rise.
B)  risk rises but expected return falls.
C)  risk falls, but expected return rises.
D)  both risk and expected return fall.E) B) and D)
F) A) and B)

Question 4

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Accepted Answer

A)  $66,225.25
B)  $67,556.42
C)  $68,058.32
D)  $71,428.57E) B) and C)
F) A) and B)

Question 5

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Accepted Answer

A) True 
 B)False

Question 6

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $998.25 in your account. If your accountant is correct, what is the current interest rate?

Accepted Answer

A)  9 percent
B)  10 percent
C)  11 percent
D)  12 percentE) B) and C)
F) None of the above

Question 7

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Accepted Answer

A)  $725.62. It would be higher if the interest rate were higher.
B)  $727.28. It would be higher if the interest rate were higher.
C)  $725.62. It would be lower if the interest rate were higher.
D)  $727.28. It would be lower if the interest rate were higher.E) B) and D)
F) A) and C)

Question 8

Brittany wants to have about $500,000 when she retires in 10 years. She has $200,000 to deposit now. At which of the following interest rates would her deposit come closest to $500,000 after 10 years?

Accepted Answer

A)  9.6 percent
B)  9.8 percent
C)  10 percent
D)  10.2 percentE) None of the above
F) All of the above

Question 9

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Accepted Answer

A)  deadweight loss
B)  present value
C)  economic growth
D)  financial intermediationE) C) and D)
F) A) and B)

Question 10

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Accepted Answer

A)  market risk by more than an increase from 1 to 10.
B)  market risk by less than an increase from 1 to 10.
C)  firm-specific risk by more than an increase from 1 to 10.
D)  firm-specific risk by less than an increase from 1 to 10.E) A) and C)
F) B) and C)

Question 11

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 12

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

Accepted Answer

A)  the two-year account at 9 percent
B)  the three-year account at 6 percent
C)  the six-year account at 3 percent
D)  The accounts are all worth the same.E) None of the above
F) All of the above

Question 13

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Accepted Answer

A)  $22,880.00
B)  $23,200.00
C)  $23,232.00
D)  $23,328.00E) B) and C)
F) A) and D)

Question 14

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Accepted Answer

A)  lower than about 5.5 percent.
B)  higher than about 5.5 percent.
C)  lower than about 7.5 percent.
D)  higher than about 7.5 percent.E) C) and D)
F) None of the above

Question 15

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

Question 16

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 17

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Accepted Answer

A)  $95.50
B)  $95.24
C)  $95.00
D)  None of the above are correct to the nearest cent.E) C) and D)
F) A) and B)

Question 18

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Accepted Answer

A) True 
 B)False

Question 19

Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

Accepted Answer

A)  $1,157.90
B)  $1,168.65
C)  $1,176.00
D)  None of the above are correct to the nearest cent.E) None of the above
F) All of the above

Question 20

Risk aversion helps to explain various things we observe in the economy, including

Accepted Answer

A)  adherence to the old adage, "Don't put all your eggs in one basket."
B)  insurance.
C)  the risk-return trade-off.
D)  All of the above are correct.E) A) and B)
F) A) and C)

Exam 14: The Basic Tools of Finance

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Correct Answer
verified

Risk aversion helps to explain various things we observe in the economy, including

Correct Answer
verified

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Correct Answer
verified

Diversification

Correct Answer
verified

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Correct Answer
verified

In general, as a person includes fewer stocks and more bonds in his portfolio,

Correct Answer
verified

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Correct Answer
verified

Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

Correct Answer
verified

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Correct Answer
verified

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Correct Answer
verified

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Correct Answer
verified

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Correct Answer
verified

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $998.25 in your account. If your accountant is correct, what is the current interest rate?

Correct Answer
verified

Correct Answer
verified

Brittany wants to have about $500,000 when she retires in 10 years. She has $200,000 to deposit now. At which of the following interest rates would her deposit come closest to $500,000 after 10 years?

Correct Answer
verified

Correct Answer
verified

The market for insurance is an example of diversification.

Correct Answer
verified

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Correct Answer
verified

Correct Answer
verified

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Correct Answer
verified

Exam 14: The Basic Tools of Finance

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Correct AnswerverifiedShow Answer

Risk aversion helps to explain various things we observe in the economy, including

Correct AnswerverifiedShow Answer

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Correct AnswerverifiedShow Answer

Diversification

Correct AnswerverifiedShow Answer

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Correct AnswerverifiedShow Answer

In general, as a person includes fewer stocks and more bonds in his portfolio,

Correct AnswerverifiedShow Answer

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Correct AnswerverifiedShow Answer

Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

Correct AnswerverifiedShow Answer

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Correct AnswerverifiedShow Answer

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Correct AnswerverifiedShow Answer

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Correct AnswerverifiedShow Answer

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $998.25 in your account. If your accountant is correct, what is the current interest rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Brittany wants to have about $500,000 when she retires in 10 years. She has $200,000 to deposit now. At which of the following interest rates would her deposit come closest to $500,000 after 10 years?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The market for insurance is an example of diversification.

Correct AnswerverifiedShow Answer

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Correct AnswerverifiedShow Answer

Correct Answer
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