Question 1

What do stocks represent?

Accepted Answer

A)  shares of ownership in a corporation and a guaranteed stream of profits
B)  shares of ownership in a corporation and an entitlement to its future profits
C)  debt contracts with a corporation and regular interest payments on the loan
D)  debt contracts with a corporation and variable interest payments on the loanE) B) and C)
F) None of the above

Question 2

The risk-free interest rate is the rate on long-term U.S.government bonds.

Accepted Answer

A) True 
 B)False

Question 3

Other factors constant, if the interest rate is higher, the present value of a certain future amount will be smaller.

Accepted Answer

A) True 
 B)False

Question 4

(Advanced analysis)  Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Accepted Answer

A)  5.2
B)  6.8
C)  8.3
D)  10E) All of the above
F) B) and C)

Question 5

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.When the CD matures in 10 years, you will get more than $9,000 from it.

Accepted Answer

A) True 
 B)False

Question 6

If an amount $AAA today earns interest at a rate of i percent per year, then the accumulated amount at the end of n years will be

Accepted Answer

A)  $AAA × n × i.
B)  $AAA × in.
C)  ($AA
A)  n × (1 + i) .
D)  $AAA × (1 + i) n.E) C) and D)
F) None of the above

Question 7

Which of the following statements is true about investing in stocks and bonds?

Accepted Answer

A)  Issuers of stocks can default on their stock obligations.
B)  Investing in stocks involves less risk because the future payments are less uncertain.
C)  In case of bankruptcy, bondholders get paid first ahead of stockholders.
D)  Bankruptcy occurs when the issuing firm is unable to fulfill its stock obligations.E) None of the above
F) B) and D)

Question 8

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year.The current market interest rate is 5 percent.What is the present value of this promotional budget?

Accepted Answer

A)  $175,146
B)  $185,123
C)  $190,476
D)  $200,000E) A) and B)
F) A) and C)

Question 9

The risk premium of a financial asset is the

Accepted Answer

A)  additional price that must be paid for riskier investments.
B)  rate that compensates for risk.
C)  rate that compensates for the risk of inflation.
D)  same as the discount rate.E) A) and D)
F) B) and D)

Question 10

Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return

Accepted Answer

A)  is 0.5 percent.
B)  is 5 percent.
C)  is 6 percent.
D)  cannot be determined until she sells the house.E) B) and C)
F) A) and D)

Question 11

Another name for diversifiable risk is

Accepted Answer

A)  systemic risk.
B)  inflationrisk.
C)  idiosyncratic risk.
D)  cyclical risk.E) All of the above
F) A) and D)

Question 12

Burt bought a house for $250,000 and plans to rent it out for $2,000 per month.His expected annual rate of return from renting the house is approximately

Accepted Answer

A)  8.0 percent.
B)  9.6 percent.
C)  19.2 percent.
D)  20 percent.E) A) and B)
F) A) and C)

Question 13

Which one of the following is an example of an economic investment?

Accepted Answer

A)  putting money in a bank CD
B)  buying a corporate bond or stock
C)  purchasing shares of a mutual fund
D)  building a new bank officeE) B) and C)
F) None of the above

Question 14

Index funds are an example of passively managed funds.

Accepted Answer

A) True 
 B)False

Question 15

Which one of the following would best describe a mutual fund?

Accepted Answer

A)  an investment that is available at many banks and is FDIC insured
B)  a company that manages a portfolio that is purchased by pooling the money of its investors
C)  a debt contract that is issued by a company and offers interest payment on the loan
D)  ownership of shares in a corporation with no guarantee the company will be profitableE) None of the above
F) B) and D)

Question 16

Suppose that Clint wins a lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

Accepted Answer

A)  Yes, but only if rapid inflation is expected over the next 30 years.
B)  Yes, but only if deflation is expected over the next 30 years.
C)  No, the rate of return will always be higher with the 30 annual payments.
D)  Yes, if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments.E) None of the above
F) All of the above

Question 17

The Federal Reserve changes the risk-free interest rate most directly

Accepted Answer

A)  by changing the reserve requirement.
B)  by changing the federal funds rate.
C)  by changing the discount rate.
D)  with open-market operations.E) B) and C)
F) A) and D)

Question 18

The present value of a future amount of money will be greater the

Accepted Answer

A)  greater the interest rate.
B)  less the amount of time before the future payment is received.
C)  more the amount of time before the future payment is received.
D)  greater the expected rate of inflation.E) B) and C)
F) A) and B)

Question 19

Investment returns

Accepted Answer

A)  are always positive.
B)  are only received when an asset is sold.
C)  are only received when there is a stream of multiple payments generated by the asset.
D)  can be received either through the sale of an asset or as a stream of payments.E) B) and D)
F) A) and B)

Question 20

Which of the following statements best describes the relationship between asset prices and average expected returns?

Accepted Answer

A)  More risky assets will have similar prices to less risky assets.
B)  Less risky assets will have lower prices than more risky assets.
C)  Less risky assets will have higher prices than more risky assets.
D)  More risky assets will have higher prices than less risky assets.E) C) and D)
F) None of the above

Exam 37: Financial Economics

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.When the CD matures in 10 years, you will get more than $9,000 from it.

Correct AnswerverifiedShow Answer

The risk-free interest rate is the rate on long-term U.S.government bonds.

Correct AnswerverifiedShow Answer

The risk premium of a financial asset is the

Correct AnswerverifiedShow Answer

Index funds are an example of passively managed funds.

Correct AnswerverifiedShow Answer

Other factors constant, if the interest rate is higher, the present value of a certain future amount will be smaller.

Correct AnswerverifiedShow Answer

Which of the following statements is true about investing in stocks and bonds?

Correct AnswerverifiedShow Answer

If an amount $AAA today earns interest at a rate of i percent per year, then the accumulated amount at the end of n years will be

Correct AnswerverifiedShow Answer

The present value of a future amount of money will be greater the

Correct AnswerverifiedShow Answer

Which one of the following is an example of an economic investment?

Correct AnswerverifiedShow Answer

Which one of the following would best describe a mutual fund?

Correct AnswerverifiedShow Answer

Burt bought a house for $250,000 and plans to rent it out for $2,000 per month.His expected annual rate of return from renting the house is approximately

Correct AnswerverifiedShow Answer

Another name for diversifiable risk is

Correct AnswerverifiedShow Answer

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Correct AnswerverifiedShow Answer

Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return

Correct AnswerverifiedShow Answer

Investment returns

Correct AnswerverifiedShow Answer

Which of the following statements best describes the relationship between asset prices and average expected returns?

Correct AnswerverifiedShow Answer

The Federal Reserve changes the risk-free interest rate most directly

Correct AnswerverifiedShow Answer

What do stocks represent?

Correct AnswerverifiedShow Answer

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year.The current market interest rate is 5 percent.What is the present value of this promotional budget?

Correct AnswerverifiedShow Answer

Suppose that Clint wins a lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

Correct AnswerverifiedShow Answer

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