Question 1

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Market risk refers to economywide risk c...

Question 2

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Accepted Answer

The presen...

Question 3

Figure 27-3
The following figure shows a utility function for Dexter. 
-Refer to Figure 27-3. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A)  the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B)  the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C)  the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D)  This cannot be determined from the graph.E) All of the above
F) A) and B)

Question 4

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 B)
F) C) and D)

Question 5

Suppose you put $475 into a bank account today. Interest is paid annually and the annual interest rate is 4.25 percent. The future value of the $475 after 3 years is

Accepted Answer

A)  $419.24.
B)  $441.87.
C)  $610.57.
D)  $538.17.E) C) and D)
F) A) and C)

Question 6

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces...

Question 7

Why might someone be willing to pay more than the fundamental value for a stock?

Accepted Answer

She may believe that...

Question 8

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Accepted Answer

A random walk means the path of a variab...

Question 9

The relation between return and risk.

Accepted Answer

The answer of The relation between return and risk....

Question 10

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

Accepted Answer

A)  A decrease in your salary
B)  An increase in the time until the payment is made
C)  A decrease in the size of the payment
D)  A decrease in the interest rateE) A) and B)
F) A) and C)

Question 11

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 7% interest rate, the present val...

Question 12

Historically, stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Question 13

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 14

Figure 27-1
The following figure shows a utility function for Ren. 
-Refer to Figure 27-1. From the appearance of the utility function, we know that

Accepted Answer

A)  if Ren owns a house, he would not consider buying fire insurance.
B)  Ren would prefer to hold a portfolio of stocks with an average return of 6 percent and a standard deviation of 1 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 5 percent.
C)  Ren 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)  Ren is not risk averse.E) B) and D)
F) A) and B)

Question 15

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Accepted Answer

A) True 
 B)False

Question 16

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Accepted Answer

A)  Option 1; Option 2; Option 3
B)  Option 3; Option 2; Option 1
C)  Option 2; Option 3; Option 1
D)  Option 3; Option 1; Option 2E) None of the above
F) All of the above

Question 17

Fatima knows that she has about $122 in her bank account. She knows she earned an interest rate of 3 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Accepted Answer

A)  $4,066.67
B)  $118.45
C)  $125.66
D)  $112.95E) A) and B)
F) B) and D)

Question 18

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

Accepted Answer

A) True 
 B)False

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

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu...

Exam 27: Tools of Finance

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Correct AnswerverifiedWith a 7% interest rate, the present val...View AnswerShow Answer

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Correct AnswerverifiedA random walk means the path of a variab...View AnswerShow Answer

The relation between return and risk.

Correct AnswerverifiedShow Answer

Fatima knows that she has about $122 in her bank account. She knows she earned an interest rate of 3 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Correct AnswerverifiedShow Answer

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

Correct AnswerverifiedShow Answer

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Correct AnswerverifiedAn increase in the interest rate reduces...View AnswerShow Answer

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

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

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Correct AnswerverifiedMarket risk refers to economywide risk c...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Correct AnswerverifiedThe presen...View AnswerShow Answer

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Correct AnswerverifiedShow Answer

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

Historically, stocks have offered higher rates of return than bonds.

Correct AnswerverifiedShow Answer

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Correct AnswerverifiedBill's behavior illu...View AnswerShow Answer

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Correct AnswerverifiedShow Answer

Figure 27-1 The following figure shows a utility function for Ren. -Refer to Figure 27-1. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

Suppose you put $475 into a bank account today. Interest is paid annually and the annual interest rate is 4.25 percent. The future value of the $475 after 3 years is

Correct AnswerverifiedShow Answer

Which of the following best illustrates diversification?

Correct AnswerverifiedShow Answer

Why might someone be willing to pay more than the fundamental value for a stock?

Correct AnswerverifiedShe may believe that...View AnswerShow Answer

Correct Answer
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With a 7% interest rate, the present val...
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Correct Answer
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A random walk means the path of a variab...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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An increase in the interest rate reduces...
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Correct Answer
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Correct Answer
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Correct Answer
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Market risk refers to economywide risk c...
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Correct Answer
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Correct Answer
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The presen...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Bill's behavior illu...
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Correct Answer
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Correct Answer
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Correct Answer
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She may believe that...
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