Question 1

One way to characterize the difference between compounding and discounting is to say that

Accepted Answer

A)   compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption.
B)   discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption.
C)   the process of compounding produces a future value, whereas the process of discounting produces a present value.
D)   the process of compounding produces a present value, whereas the process of discounting produces a future value.E) None of the above
F) A) and D)

Question 2

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Accepted Answer

A)   $180
B)   $181.82
C)   $220
D)   $222.22E) A) and C)
F) B) and D)

Question 3

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Accepted Answer

A)   20 percent
B)   25 percent
C)   28 percent
D)   None of the above is correct.E) A) and B)
F) A) and C)

Question 4

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Accepted Answer

A)   $25,962
B)   $27,297
C)   $30,188
D)   None of the above are correct to the nearest dollar.E) All of the above
F) A) and B)

Question 5

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

Accepted Answer

A)   $105.26
B)   $105.00
C)   $95.24
D)   $95.00E) B) and D)
F) B) and C)

Question 6

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) None of the above
F) A) and D)

Question 7

Albert Einstein once referred to compounding as

Accepted Answer

A)   "an obsession among economists that defies explanation."
B)   "the greatest mathematical discovery of all time."
C)   his own discovery.
D)   John Maynard Keynes's greatest contribution.E) B) and C)
F) A) and B)

Question 8

Scott Adams, creator of the comic strip Dilbert, has a theory that you should

Accepted Answer

A)   buy stock in the companies you love the most.
B)   buy stock in the companies you hate the most.
C)   make use of technical analysis when you are deciding which stocks to buy.
D)   examine companies' track records when you are deciding which stocks to buy.E) B) and C)
F) A) and D)

Question 9

Which of the following best illustrates diversification?

Accepted Answer

A)   A company that produces many different products decides to produce fewer.
B)   After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated.
C)   Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services.
D)   A person decides to purchase only stocks that have paid high dividends in the past.E) A) and C)
F) All of the above

Question 10

The efficient markets hypothesis says that

Accepted Answer

A)   only individual investors can make money in the stock market.
B)   it should be easy to find stocks whose price differs from their fundamental value.
C)   stock prices follow a random walk.
D)   All of the above are correct.E) All of the above
F) A) and C)

Question 11

Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?

Accepted Answer

A)   Amy
B)   Bill
C)   Celia
D)   They each get the same amount.E) A) and D)
F) All of the above

Question 12

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Accepted Answer

A)   no less than 4.53 percent.
B)   no greater than 4.53 percent.
C)   no less than 5.81 percent.
D)   no greater than 5.81 percent.E) B) and C)
F) All of the above

Question 13

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) All of the above
F) B) and C)

Question 14

Figure 9-2. The figure shows a utility function for Mary Ann.
 
-Refer to Figure 9-2. Suppose Mary Ann begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Accepted Answer

A)   If it is "heads," she wins $100; if it is tails, she loses $95.
B)   If it is "heads," she wins $150; if it is tails, she loses $150.
C)   If it is "heads," she wins $150; if it is tails, she loses $140.
D)   She definitely would not accept any of these bets.E) B) and D)
F) None of the above

Question 15

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

Accepted Answer

A)   both Nicole's and Braden's
B)   Nicole's but not Braden's
C)   Braden's but not Nicole's
D)   neither Braden's nor Nicole'sE) C) and D)
F) All of the above

Question 16

Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?

Accepted Answer

A)   2 percent
B)   4 percent
C)   6 percent
D)   8 percentE) A) and D)
F) C) and D)

Question 17

Fundamental analysis determines the value of a stock based on

Accepted Answer

A)   dividends.
B)   the expected final sale price.
C)   the ability of the corporation to earn profits.
D)   All of the above are correct.E) A) and B)
F) B) and D)

Question 18

The performance of index funds

Accepted Answer

A)   usually falls short of the performance of actively-managed funds.
B)   provides evidence in support of the notion that stock prices do not depend upon supply and demand.
C)   provides evidence in support of the efficient markets hypothesis.
D)   provides evidence in support of the notion that stock-market participants are irrational.E) A) and B)
F) B) and C)

Question 19

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 20

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Accepted Answer

A)   $300 paid in two years
B)   $150 paid in one year plus $140 paid in two years
C)   $100 paid today plus $100 paid in one year plus $100 paid in two years
D)   $285 todayE) None of the above
F) C) and D)

Exam 9: The Basic Tools of Finance

Figure 9-2. The figure shows a utility function for Mary Ann. -Refer to Figure 9-2. Suppose Mary Ann begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Correct Answer
verified

The performance of index funds

Correct Answer
verified

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Correct Answer
verified

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Correct Answer
verified

Fundamental analysis determines the value of a stock based on

Correct Answer
verified

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

Correct Answer
verified

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Correct Answer
verified

The efficient markets hypothesis says that

Correct Answer
verified

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Correct Answer
verified

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Correct Answer
verified

Scott Adams, creator of the comic strip Dilbert, has a theory that you should

Correct Answer
verified

Which of the following best illustrates diversification?

Correct Answer
verified

Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?

Correct Answer
verified

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Correct Answer
verified

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Albert Einstein once referred to compounding as

Correct Answer
verified

One way to characterize the difference between compounding and discounting is to say that

Correct Answer
verified

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Correct Answer
verified

Exam 9: The Basic Tools of Finance

Figure 9-2. The figure shows a utility function for Mary Ann. -Refer to Figure 9-2. Suppose Mary Ann begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Correct AnswerverifiedShow Answer

The performance of index funds

Correct AnswerverifiedShow Answer

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Correct AnswerverifiedShow Answer

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Correct AnswerverifiedShow Answer

Fundamental analysis determines the value of a stock based on

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

The efficient markets hypothesis says that

Correct AnswerverifiedShow Answer

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Correct AnswerverifiedShow Answer

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

Scott Adams, creator of the comic strip Dilbert, has a theory that you should

Correct AnswerverifiedShow Answer

Which of the following best illustrates diversification?

Correct AnswerverifiedShow Answer

Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?

Correct AnswerverifiedShow Answer

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Correct AnswerverifiedShow Answer

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Albert Einstein once referred to compounding as

Correct AnswerverifiedShow Answer

One way to characterize the difference between compounding and discounting is to say that

Correct AnswerverifiedShow Answer

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Correct AnswerverifiedShow Answer

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