Question 1

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

Question 2

Which of the following changes would decrease 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)  an increase in the interest rate
D)  All of the above are correct.E) B) and C)
F) A) and D)

Question 3

Suppose the interest rate is 5 percent. Consider three payment options:
1)  $500 today.
2)  $520 one year from today.
3)  $550 two years from today.
Which of the following is correct?

Accepted Answer

A)  1 has the lowest present value and 3 has the highest.
B)  2 has the lowest present value and 1 has the highest.
C)  3 has the lowest present value and 2 has the highest.
D)  None of the above is correct.E) B) and C)
F) All of the above

Question 4

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Accepted Answer

A) True 
 B)False

Question 5

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A)  raise the price and raise the present value of the corporation's stock.
B)  raise the price and lower the present value of the corporation's stock.
C)  lower the price and raise the present value of the corporation's stock.
D)  lower the price and lower the present value of the corporation's stock.E) None of the above
F) C) and D)

Question 6

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Accepted Answer

For example at 3 percent the p...

Question 7

Most financial decisions involve two related elements:

Accepted Answer

A)  advice and consent.
B)  investment and taxes.
C)  time and risk.
D)  saving and consumption.E) C) and D)
F) A) and D)

Question 8

Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

Accepted Answer

With a 7% interest rate the rule of 70 i...

Question 9

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?

Accepted Answer

A)  2%
B)  ​5%
C)  ​7%
D)  ​10%E) A) and B)
F) A) and C)

Question 10

The risk of a portfolio

Accepted Answer

A)  increases as the number of stocks in the portfolio increases.
B)  is usually measured using a statistic called the standard diversification.
C)  is positively related to the average return of the portfolio.
D)  bears no relationship to the average return of the portfolio.E) None of the above
F) A) and B)

Question 11

If the interest rate is 4%, in which of the following cases is the future value the largest?

Accepted Answer

A)  An initial value of $1,000 deposited for 5 years.
B)  An initial value of $950 deposited for 6 years.
C)  An initial value of $900 deposited for 7 years.
D)  An initial value of $850 deposited for 8 years.E) A) and C)
F) A) and D)

Question 12

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Accepted Answer

A) True 
 B)False

Question 13

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Accepted Answer

A)  chance of winning $120 in two years and the interest rate was 11%.
B)  chance of winning $114 in two years and the interest rate was 7%.
C)  chance of winning $110 in two years and the interest rate was 3%.
D)  None of the above are correct; a risk averse person would not accept any of the above bets.E) All of the above
F) C) and D)

Question 14

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?

Accepted Answer

A)  $1(1 + .05) 16
B)  $1(1 + .05 16 
B)  $1(1 + .05   16)    16 
C)  $1(1 + .05   16)  
D)  $1(1 + 16/.05) 16" class="answers-bank-image d-inline" rel="preload" > 16)  16 
B)  $1(1 + .05   16)    16 
C)  $1(1 + .05   16)  
D)  $1(1 + 16/.05) 16" class="answers-bank-image d-inline" rel="preload" > 16
C)  $1(1 + .05 16 
B)  $1(1 + .05   16)    16 
C)  $1(1 + .05   16)  
D)  $1(1 + 16/.05) 16" class="answers-bank-image d-inline" rel="preload" > 16) 
D)  $1(1 + 16/.05) 16E) None of the above
F) A) and B)

Question 15

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)  if Britney owns a house, she would not consider buying fire insurance.
B)  Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.
C)  Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
D)  All of the above are correct.E) A) and B)
F) A) and C)

Question 16

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

Accepted Answer

A)  $100 today plus $190 one year from today
B)  $150 today plus $140 one year from today
C)  $200 today plus $90 one year from today
D)  $250 today plus $40 one year from todayE) None of the above
F) All of the above

Question 17

Scenario 27-2
Suppose Dave has a utility function  where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Is Dave risk averse? Explain.

Accepted Answer

Yes, Dave is risk averse. The ...

Question 18

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

Question 19

Economists have developed models of risk aversion using the concept of

Accepted Answer

A)  utility and the associated assumption of diminishing marginal utility.
B)  utility and the associated assumption of increasing marginal utility.
C)  income and the associated assumption of diminishing marginal wealth.
D)  income and the associated assumption of increasing marginal wealth.E) A) and C)
F) A) and D)

Question 20

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

Exam 27: Tools of Finance

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Is Dave risk averse? Explain.

Correct AnswerverifiedYes, Dave is risk averse. The ...View AnswerShow Answer

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Correct AnswerverifiedFor example at 3 percent the p...View AnswerShow Answer

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?

Correct AnswerverifiedShow Answer

Most financial decisions involve two related elements:

Correct AnswerverifiedShow Answer

If the interest rate is 4%, in which of the following cases is the future value the largest?

Correct AnswerverifiedShow Answer

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Correct AnswerverifiedShow Answer

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Correct AnswerverifiedShow Answer

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

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

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

The risk of a portfolio

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates adverse selection?

Correct AnswerverifiedShow Answer

Suppose the interest rate is 5 percent. Consider three payment options: 1) $500 today. 2) $520 one year from today. 3) $550 two years from today. Which of the following is correct?

Correct AnswerverifiedShow Answer

Economists have developed models of risk aversion using the concept of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

Correct AnswerverifiedWith a 7% interest rate the rule of 70 i...View AnswerShow Answer

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Correct AnswerverifiedShow Answer

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?

Correct AnswerverifiedShow Answer

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Yes, Dave is risk averse. The ...
View Answer

Correct Answer
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For example at 3 percent the p...
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Correct Answer
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Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?

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With a 7% interest rate the rule of 70 i...
View Answer

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