Question 1

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 C)
F) B) and C)

Question 2

A firm has three 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 $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 C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   The answer depends on the rate of interest, which is not specified here.E) A) and C)
F) A) and B)

Question 3

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

Accepted Answer

A)   option A.
B)   option B.
C)   option C.
D)   either A or B because they are the same to her.E) None of the above
F) B) and D)

Question 4

Compounding refers directly to

Accepted Answer

A)   finding the present value of a future sum of money.
B)   finding the future value of a present sum of money.
C)   changes in the interest rate over time on a bank account or a similar savings vehicle.
D)   interest being earned on previously-earned interest.E) B) and D)
F) B) and C)

Question 5

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

Question 6

After much anticipation a company releases a new smartphone. The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would

Accepted Answer

A)   raise the present value and the price of the corporation's stock.
B)   raise the present value and reduce the price of the corporation's stock.
C)   reduce the present value and the price of the corporation's stock.
D)   reduce the present value and raise the price of the corporation's stock.E) C) and D)
F) A) and D)

Question 7

Which of the following is adverse selection?

Accepted Answer

A)   the risk associated with selecting stocks in only a few specific companies
B)   the risk that a person will become overconfident in his ability to select stocks
C)   a high-risk person being more likely to apply for insurance
D)   after obtaining insurance a person having less incentive to be carefulE) All of the above
F) A) and B)

Question 8

Dividends

Accepted Answer

A)   are the rates of return on mutual funds.
B)   are cash payments that companies make to shareholders.
C)   are the difference between the price and present value per share of a stock.
D)   are the rates of return on a company's capital stock.E) B) and C)
F) A) and D)

Question 9

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Accepted Answer

A) True 
 B)False

Question 10

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)   Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO.
B)   Simpson announces that its profits were low, but not as low as the market had expected.
C)   Analysis by a column in a business weekly indicates that Simpson is overvalued.
D)   All of the above would increase the price.E) A) and D)
F) A) and C)

Question 11

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Accepted Answer

A)   4.5 percent
B)   5.4 percent
C)   6.2 percent
D)   8.0 percentE) B) and C)
F) None of the above

Question 12

In answering which of the following questions would you find it necessary to calculate a future value?

Accepted Answer

A)   If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years?
B)   Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years?
C)   As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years?
D)   You would find it necessary to calculate a future value in order to answer all of these questions.E) A) and C)
F) None of the above

Question 13

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

Question 14

Accepted Answer

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?  ) undefined
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Question 15

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

Question 16

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?

Accepted Answer

A)   7 percent
B)   8 percent
C)   9 percent
D)   10 percentE) A) and C)
F) B) and C)

Question 17

Diversifying

Accepted Answer

A)   increases the standard deviation of the value of a portfolio indicating its risk has increased.
B)   increases the standard deviation of the value of a portfolio indicating its risk has decreased.
C)   decreases the standard deviation of the value of a portfolio indicating its risk has increased.
D)   decreases the standard deviation of the value of a portfolio indicating its risk has decreased.E) A) and D)
F) A) and C)

Question 18

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth and is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth and is not risk averse.E) B) and C)
F) A) and D)

Question 19

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

Accepted Answer

A)   a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1
B)   a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100
C)   a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1
D)   All of the above are correct.E) All of the above
F) A) and B)

Question 20

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Accepted Answer

A)   $240 paid in three years
B)   $225 paid in two years
C)   $210 paid in one year
D)   $200 todayE) A) and B)
F) B) and D)

Exam 27: The Basic Tools of Finance

Fundamental analysis determines the value of a stock based on

Correct Answer
verified

Which of the following is adverse selection?

Correct Answer
verified

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

Correct Answer
verified

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

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

After much anticipation a company releases a new smartphone. The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would

Correct Answer
verified

Dividends

Correct Answer
verified

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Correct Answer
verified

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Correct Answer
verified

Correct Answer
verified

Compounding refers directly to

Correct Answer
verified

In answering which of the following questions would you find it necessary to calculate a future value?

Correct Answer
verified

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Correct Answer
verified

Correct Answer
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Correct Answer
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Diversifying

Correct Answer
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The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Correct Answer
verified

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Correct Answer
verified

Exam 27: The Basic Tools of Finance

Fundamental analysis determines the value of a stock based on

Correct AnswerverifiedShow Answer

Which of the following is adverse selection?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

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

After much anticipation a company releases a new smartphone. The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would

Correct AnswerverifiedShow Answer

Dividends

Correct AnswerverifiedShow Answer

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Correct AnswerverifiedShow Answer

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Compounding refers directly to

Correct AnswerverifiedShow Answer

In answering which of the following questions would you find it necessary to calculate a future value?

Correct AnswerverifiedShow Answer

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Diversifying

Correct AnswerverifiedShow Answer

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Correct AnswerverifiedShow Answer

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