Question 1

If a person is risk averse, then as wealth increases, total utility of wealth

Accepted Answer

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

Question 2

Which of the following defines an annuity?

Accepted Answer

A)  For a fee, an insurance company provides you with regular income until you die.
B)  A surcharge is added to life-insurance premiums paid by persons in dangerous occupations.
C)  Annuity is another name for stock funds managed by mutual fund managers.
D)  Annuity is another name for any diversified portfolio.E) None of the above
F) A) and B)

Question 3

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

Accepted Answer

A)  70/(1 - r)  years.
B)  70/(1 + r)  years.
C)  70/r years.
D)  70(1 + r) /r years.E) B) and C)
F) A) and C)

Question 4

The efficient markets hypothesis implies that

Accepted Answer

A)  building a portfolio based on a published list of the "most respected" companies is likely to produce a better-than-average return.
B)  if a stock rose in price last year, it is likely to rise in price this year.
C)  managed mutual funds should generally outperform indexed mutual funds.
D)  None of the above are correct.E) A) and B)
F) A) and C)

Question 5

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Accepted Answer

A)  Higher average returns come at the price of higher risk.
B)  People who are risk averse should never hold stock.
C)  Diversification cannot eliminate all of the risk in stock portfolio.
D)  None of her conclusions are incorrect.E) C) and D)
F) All of the above

Question 6

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?

Accepted Answer

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

Question 7

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Accepted Answer

The efficient markets hypothes...

Question 8

The financial system

Accepted Answer

A)  involves bank accounts, mortgages, stock prices, and many other items.
B)  involves decisions and actions undertaken by people at a point in time that affect their lives in the future.
C)  coordinates the economy's saving and investment.
D)  All of the above are correct.E) All of the above
F) B) and D)

Question 9

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 D)
F) A) and C)

Question 10

Describe the shape of the utility function of a risk averse person.

Accepted Answer

Its slope ...

Question 11

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) B) and D)
F) A) and B)

Question 12

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Accepted Answer

A)  firm-specific risk, which will likely raise shareholders' demand for higher return.
B)  firm-specific risk, which will likely not likely raise shareholders' demand for higher return.
C)  market risk, which will likely raise shareholders' demand for higher return.
D)  market risk, which will likely not raise shareholders' demand for higher return.E) All of the above
F) C) and D)

Question 13

Which of the following is correct?

Accepted Answer

A)  Managed funds typically have a higher return than indexed funds. This tends to refute the efficient market hypothesis.
B)  Managed funds typically have a higher return than indexed funds. This tends to support the efficient market hypothesis.
C)  Index funds typically have a higher rate of return than managed funds. This tends to refute the efficient market hypothesis.
D)  Index funds typically have a higher rate of return than managed funds. This tends to support the efficient market hypothesis.E) None of the above
F) C) and D)

Question 14

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Accepted Answer

A)  $285.83
B)  $236.98
C)  $202.04
D)  $145.65E) B) and D)
F) B) and C)

Question 15

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Accepted Answer

A)  $12,579.84
B)  $12,596.80
C)  $12,597.12
D)  None of the above are correct to the nearest cent.E) A) and B)
F) None of the above

Question 16

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Accepted Answer

A)  8 percent
B)  9 percent
C)  10 percent
D)  None of the above is correct.E) A) and B)
F) All of the above

Question 17

At which interest rate is the present value of $260.10 two years from today equal to $250 today?

Accepted Answer

A)  2 percent
B)  3 percent
C)  4 percent
D)  5 percentE) All of the above
F) None of the above

Question 18

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Accepted Answer

A)  5 percent
B)  6 percent
C)  7 percent
D)  8 percentE) A) and D)
F) A) and C)

Question 19

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Accepted Answer

A)  benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own.
B)  benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
C)  eliminate market risk.
D)  reduce the standard deviation of his or her portfolio to zero.E) None of the above
F) A) and B)

Question 20

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is

Accepted Answer

A)  no less than 9.48 percent.
B)  no greater than 9.48 percent.
C)  no less than 10.83 percent.
D)  no greater than 10.83 percent.E) B) and D)
F) None of the above

Exam 27: Tools of Finance

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Correct AnswerverifiedShow Answer

If a person is risk averse, then as wealth increases, total utility of wealth

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $260.10 two years from today equal to $250 today?

Correct AnswerverifiedShow 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?

Correct AnswerverifiedShow Answer

The financial system

Correct AnswerverifiedShow Answer

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Correct AnswerverifiedThe efficient markets hypothes...View AnswerShow Answer

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Correct AnswerverifiedShow Answer

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies that

Correct AnswerverifiedShow Answer

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

Correct AnswerverifiedShow Answer

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Correct AnswerverifiedShow Answer

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

Correct AnswerverifiedShow Answer

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Correct AnswerverifiedShow Answer

Describe the shape of the utility function of a risk averse person.

Correct AnswerverifiedIts slope ...View AnswerShow 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

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

Which of the following defines an annuity?

Correct AnswerverifiedShow Answer

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The efficient markets hypothes...
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Its slope ...
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