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| Chapter 27: The Basic Tools of Finance |
1. The amount of
money that someone would pay today for the right to receive a future payment is
called the
a. present value of the future payment.
b. determinate value of the future payment.
c. market interest rate.
d. principal.
2. Which of the
following changes would increase the present value of a future payment?
a. a decrease in the size of the payment
b. a decrease in the certainty of the payment actually being
received
c. an increase in the amount of time that elapses before
receiving the payment
d. a decrease in the interest rate
3. You have a bond
that you can redeem for $10,000 one year from now. The interest rate is 10
percent per year. How much is the bond worth today?
a. $9,091.01
b. $10,000.00
c. $8,264.46
d. $9,523.81
4. A snowplow will
generate a net income of $2,000 per year for its owner. After 8 years, the plow
will break down and have zero value. The maximum amount of money anyone would
pay for the plow is
a. less than $2,000.
b. $2000.
c. between $2,000 and $16,000.
d. $16,000.
5. 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% per year. Rank these three options from highest present
value to lowest present value.
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 2
6. Someone who cares
only about expected return and doesn’t worry about risk is someone who is
a. risk averse.
b. risk neutral.
c. risk seeking.
d. irrational.
7. Diversification
has the advantage of
a. reducing expected return.
b. reducing actual return.
c. reducing risk.
d. reducing the profits of insurance companies.
8. To diversify, a
homeowner with a variable-rate mortgage should choose investments that
a. pay higher returns when interest rates rise and lower
returns when interest rates fall.
b. pay lower returns when interest rates rise and higher
returns when interest rates fall.
c. provide a higher return than the market average.
d. provide a lower return than the market average.
9. Rex is a mortgage
broker, who is paid by commission. When interest rates decline, he does a lot
of business and earns a lot of money, as more people buy houses or refinance
their mortgages. But when interest rates rise, business falls substantially. To
diversify, Rex should choose investments that
a. provide a higher return than the market average.
b. provide a lower return than the market average.
c. pay higher returns when interest rates rise and lower
returns when interest rates fall.
d. pay lower returns when interest rates rise and higher
returns when interest rates fall.
10. A person is risk
averse if he or she
a. prefers a riskier income, holding fixed its expected
value.
b. doesn’t care about the riskiness of income.
c. prefers a less-risky income, holding fixed its expected
value.
d. refuses to diversify risk.
11. When an agent
lacks an incentive to promote the best interests of the principal, and the
principal cannot observe the actions of the agent, there is said to be
a. an optimal contract.
b. diversification.
c. moral hazard.
d. idiosyncratic risk.
12. Steve bought fire
insurance for his house for an amount that was greater than his house was
worth, then became careless about leaving burning cigarettes around. This is an
example of
a. an optimal contract.
b. diversification.
c. moral hazard.
d. aggregate risk.
13. Adverse selection
occurs when
a. sellers have relevant information about some aspect of
the product’s quality that buyers lack (or vice versa).
b. an agent lacks the incentive to act in the best interests
of the principal and the principal cannot observe the actions of the agent.
c. a principal and an agent reach an agreement that
maximizes the principal’s profit while providing an incentive for the agent to
participate.
d. a principal obtains information about an agent’s actions.
14. The fact that
someone with a high risk of medical problems is more likely to buy a lot of
health insurance is an example of
a. adverse selection.
b. monitoring.
c. moral hazard.
d. an optimal contract.
15. Diversification
can eliminate
a. all types of risk.
b. idiosyncratic risk but not aggregate risk.
c. aggregate risk but not idiosyncratic risk.
d. all types of risk but only if insurance is purchased.
16. Bonds are
preferred to stocks by individual investors who
a. need to have immediate access to their money.
b. don't think the business is profitable.
c. prefer a guaranteed lower return to a risky higher return.
d. prefer a risky higher return to a guaranteed lower
return.
17. Corporate profits
that are not reinvested in the corporation are distributed to
a. consumers in the form of lower prices.
b. management and bondholders.
c. management and the board of directors.
d. shareholders in the form of dividends.
18. Which of the
following factors would be considered by a fundamental analyst when predicting
a firm's stock price?
a. recent changes in the stock's price
b. the knowledge and skills of the firm's current management
c. the marketing strategies of the firm's competitors
d. Both b and c are correct.
19. Which of the
following factors would not be considered by a fundamental analyst when
predicting stock prices?
a. the future demand for a firm's products
b. the patents held by a firm
c. the likelihood of new firms competing with an existing
firm
d. recent jumps in a firm's stock prices
20. If the price of
stock is greater than what you believe to be the true value of the business
then the stock is
a. undervalued.
b. overvalued.
c. fairly valued.
d. no longer going to be traded.
21. According to the
efficient markets hypothesis,
a. fundamental analysis is a way to profit from predicting
stock prices.
b. fundamental and technical analysis are largely useless.
c. technical analysis is the best approach to profit from
predicting stock prices.
d. fundamental and technical analysis must be synthesized in
order to profit from predicting stock prices.
22. The efficient
markets view of the stock market says that new information
a. is quickly and completely incorporated into stock prices.
b. is incorporated into stock prices only when discovered by
fundamental analysis.
c. causes stock prices to increase.
d. has little impact on stock prices.
23. If the efficient
markets theory is correct, stock prices
a. do not respond to unpredictable events.
b. are unpredictable.
c. rise at the beginning of a month and fall at the end of a
month.
d. follow a predictable pattern over time.
24. If stock prices
follow a random walk, it means
a. long periods of declining prices are followed by long
periods of rising prices.
b. the greater the number of consecutive days of price declines,
the greater the probability prices will increase the following day.
c. stock prices are unrelated to random events that shock
the economy.
d. stock prices are just as likely to rise as to fall at any
given time.
25. If stock prices
follow a random walk then stock investors can make large profits by
a. using computer programs that perform technical analysis
using past stock trends.
b. performing fundamental analysis of stocks using data
contained in annual reports.
c. quickly responding to rumors of mergers between
companies.
d. using inside information.
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