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Exam 27: Tools of Finance

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Question 1

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Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

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Question 2

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Morgan decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Morgan probably believes that

A) stock prices do not follow a random walk.
B) the stock market is not informationally efficient.
C) stock market irrationality exists.
D) it is better to own stock in 23 companies than it is to own stock in 3 companies.

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

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Question 3

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Diversification cannot reduce market risk.

Write the formula to find the present value of $x to be paid in n years.

If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

Tyler put $430 in the bank one year ago and forgot about it. Today, the bank sent Tyler a statement indicating that he now has $442.90 in his account. What interest rate did Tyler earn?

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.​

If Alan is risk-averse, then he will always

For a risk averse person,

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

Scenario 27-1 ​ Lisa has a utility function $U = W ^ { 1 / 2 }$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains. ​ -Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Which of the following actions best illustrates moral hazard?

Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years.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?

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Risk-averse persons will take no risks.

Risk aversion simply means that people dislike bad things to happen.

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

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work.