Question 1

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of FineLine Corporation Stock fall?

Accepted Answer

A)   both the interest rate rising and the revenue announcement
B)   neither the interest rate rising nor the revenue announcement
C)   only the interest rate rising
D)   only the revenue announcementE) B) and D)
F) B) and C)

Question 2

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

Question 3

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Accepted Answer

A)   provide a higher return than the market average.
B)   provide a lower return than the market average.
C)   pay higher returns when interest rates rise and lower returns when interest rates fall.
D)   pay lower returns when interest rates rise and higher returns when interest rates fall.E) C) and D)
F) B) and D)

Question 4

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) A) and C)
F) All of the above

Question 5

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Accepted Answer

A)   an interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account
B)   an interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account
C)   an interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account
D)   an interest rate of 4.5 percent, with no processing fee and no bonusE) A) and B)
F) None of the above

Question 6

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 7

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Accepted Answer

A) True 
 B)False

Question 8

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

A)   risk increases at an increasing rate.
B)   risk increases at a decreasing rate.
C)   risk decreases at an increasing rate.
D)   risk decreases at a decreasing rate.E) A) and C)
F) A) and B)

Question 9

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

Accepted Answer

A)   a decrease 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) All of the above
F) A) and B)

Question 10

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Accepted Answer

A)   surplus, so its price will rise.
B)   surplus, so its price will fall.
C)   shortage, so its price will rise.
D)   shortage, so its price will fall.E) B) and C)
F) A) and B)

Question 11

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) None of the above
F) All of the above

Question 12

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?

Accepted Answer

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

Question 13

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Accepted Answer

A)   Interest rates rise and you get the payment sooner.
B)   Interest rates rise and you have to wait longer for the payment.
C)   Interest rates fall and you get the payment sooner.
D)   Interest rates fall and you have to wait longer to get the payment.E) A) and D)
F) B) and C)

Question 14

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)   A person purposely chooses bonds of corporations with high default risk because of the high returns.
B)   A person dislikes losing $400 more than he likes winning $400.
C)   After obtaining automobile insurance a person drives less carefully than before.
D)   A person intending to take up dangerous hobbies applies for life insurance.E) B) and C)
F) A) and D)

Question 15

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

Accepted Answer

A)   4.88 percent
B)   6.00 percent
C)   12.36 percent
D)   None of the above is correct.E) B) and C)
F) None of the above

Question 16

The rule of 70 applies to a growing savings account but not to a growing economy.

Accepted Answer

A) True 
 B)False

Question 17

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A)   the distance between the origin and point B
B)   the distance between the origin and point C
C)   the distance between point A and point C
D)   the distance between point B and point CE) A) and D)
F) A) and C)

Question 18

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Accepted Answer

A)   5.50 percent
B)   5.65 percent
C)   6.25 percent
D)   7.05 percentE) A) and D)
F) None of the above

Question 19

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Accepted Answer

A)   This stock is overvalued; you should consider adding it to your portfolio.
B)   This stock is overvalued; you shouldn't consider adding it to your portfolio.
C)   This stock is undervalued; you should consider adding it to your portfolio.
D)   This stock is undervalued; you shouldn't consider adding it to your portfolio.E) A) and D)
F) A) and C)

Question 20

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Accepted Answer

A)   $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years.
B)   $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years.
C)   $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years.
D)   $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.E) A) and D)
F) B) and C)

Exam 19: The Basic Tools of Finance

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Correct Answer
verified

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

Correct Answer
verified

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Correct Answer
verified

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

Correct Answer
verified

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

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

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Correct Answer
verified

The rule of 70 applies to a growing savings account but not to a growing economy.

Correct Answer
verified

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

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

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Correct Answer
verified

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Correct Answer
verified

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Correct Answer
verified

Correct Answer
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Which of the following actions best illustrates adverse selection?

Correct Answer
verified

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Correct Answer
verified

Correct Answer
verified

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

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Correct Answer
verified

Correct Answer
verified

Exam 19: The Basic Tools of Finance

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

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

A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Correct AnswerverifiedShow Answer

The rule of 70 applies to a growing savings account but not to a growing economy.

Correct AnswerverifiedShow Answer

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

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

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Correct AnswerverifiedShow Answer

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Correct AnswerverifiedShow Answer

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates adverse selection?

Correct AnswerverifiedShow Answer

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Correct AnswerverifiedShow Answer

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

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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