Question 1

Which of the following statements best reflects the concept of present value?

Accepted Answer

A)  "The savings bond I bought five years ago is now worth $1,000."
B)  "My $100 savings bond will be worth $200 in 10 years."
C)  "You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now."
D)  "The $5,000 in my savings account is worth less today than five years ago because of inflation."E) A) and D)
F) None of the above

Question 2

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P 500 are called

Accepted Answer

A)  index funds.
B)  dividend funds.
C)  portfolio funds.
D)  capital gain funds.E) A) and D)
F) B) and C)

Question 3

When the Security Market Line shifts up, the average expected rate of return on investment assets with given risk levels is increasing.

Accepted Answer

A) True 
 B)False

Question 4

Other factors constant, the future value will be smaller,

Accepted Answer

A)  the larger is its present value.
B)  the higher is the interest rate.
C)  the shorter is the time period t.
D)  the larger is the number of periods.E) None of the above
F) A) and C)

Question 5

Maria is looking to buy one of two houses to rent out for additional income.She determines that the first house, priced at $200,000, could rent for $1,500 per month.If the second house is priced at $280,000, how much rent would Maria have to charge to get an equivalent yearly rate of return?

Accepted Answer

A)  $2,100 per month
B)  $2,600 per month
C)  $2,800 per month
D)  It cannot be determined with the information given.E) All of the above
F) A) and D)

Question 6

Payments to holders of corporate bonds are known as dividends.

Accepted Answer

A) True 
 B)False

Question 7

Refer to the graph. An increase in the Security Market Line from SML1 to SML2 and an increase in the average expected rate of return of asset A from Y1 to Y2 would be explained by A) arbitrage only. B) a restrictive monetary policy only. C) both arbitrage and a restrictive monetary policy. D) neither arbitrage nor a restrictive monetary policy." class="answers-bank-image d-inline" rel="preload" > Refer to the graph. An increase in the Security Market Line from SML1 to SML2 and an increase in the average expected rate of return of asset A from Y1 to Y2 would be explained by

Accepted Answer

A)  arbitrage only.
B)  a restrictive monetary policy only.
C)  both arbitrage and a restrictive monetary policy.
D)  neither arbitrage nor a restrictive monetary policy.E) All of the above
F) None of the above

Question 8

The U.S.federal government is unlikely to default on its bonds because

Accepted Answer

A)  the bonds are all long-term bonds and they are insured.
B)  the federal government has the ability to collect taxes and to sell securities to the Fed.
C)  foreigners are willing to buy the federal government bonds and lend to the U.S.government.
D)  the federal government can always borrow from the states and from businesses.E) B) and C)
F) A) and D)

Question 9

One asset has a beta of 1.5 and another asset has a beta of 0.75.The difference in beta means that the asset with a beta of 0.75 has

Accepted Answer

A)  75 percent less nondiversifiable risk than the asset with a beta of 1.5.
B)  75 percent more nondiversifiable risk than the asset with a beta of 1.5.
C)  twice as much nondiversifiable risk as the asset with a beta of 1.5.
D)  one-half as much nondiversifiable risk as the asset with a beta of 1.5.E) A) and B)
F) C) and D)

Question 10

Alex wants to borrow $1,000 from Kara.If he repays the loan in one year, Kara will require him to pay 5 percent interest on the loan.If Alex wants to repay the loan over three years, but Kara strongly prefers present to future consumption, we would expect the interest rate on a three-year loan to be

Accepted Answer

A)  lower than for a one-year loan.
B)  greater than for a one-year loan.
C)  the same as for a one-year loan.
D)  higher if Kara expected there to be no inflation over the loan repayment period.E) A) and B)
F) C) and D)

Question 11

Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.

Accepted Answer

A)  $2,480
B)  $2,524.95
C)  $1,584.19
D)  $1,520E) B) and D)
F) B) and C)

Question 12

Economic investment refers to

Accepted Answer

A)  buying a financial asset for a gain.
B)  selling a financial asset for a gain.
C)  postponing purchases of goods and services.
D)  making new additions to a firm's stock of capital.E) A) and B)
F) A) and C)

Question 13

(Advanced analysis)  Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Accepted Answer

A)  4.6 percent
B)  6.5 percent
C)  8.4 percent
D)  9.3 percentE) A) and B)
F) None of the above

Question 14

An investor with a diversified portfolio is generally less concerned about

Accepted Answer

A)  the diversifiable risk of potential new investments.
B)  rates of return of potential new investments.
C)  the nondiversifiable risk of potential new investments.
D)  recessions.E) None of the above
F) A) and B)

Question 15

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?

Accepted Answer

A)  $504
B)  $508
C)  $540
D)  $580E) All of the above
F) B) and D)

Question 16

Suppose stock A sells for $30 per share and pays dividends of $1 per share per year.Stock B sells for $40 per share and pays dividends of $2 per share per year.Through the process of arbitrage, we would expect the price of

Accepted Answer

A)  stock A to fall and/or the price of stock B to rise.
B)  stock A to rise and/or the price of stock B to fall.
C)  both stocks to rise or fall together.
D)  neither stock to change.E) B) and C)
F) C) and D)

Question 17

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Accepted Answer

A) True 
 B)False

Question 18

If an investor owns a well-diversified portfolio, then

Accepted Answer

A)  his portfolio does not involve any risk.
B)  the idiosyncratic risk in his portfolio is minimized.
C)  the systemic risk in his portfolio is minimized.
D)  his portfolio will have the highest expected return.E) A) and B)
F) A) and C)

Question 19

Refer to the graph.The intercept of the three Security Market Lines is determined by

Accepted Answer

A)  the risk-free interest rate.
B)  the interest rate on financial assets with a beta of 1.
C)  the rate on long-term U.S.government bonds.
D)  all of these.E) B) and C)
F) A) and D)

Question 20

The process of arbitrage

Accepted Answer

A)  raises or lowers the average expected rate of return of a financial asset with a given level of risk.
B)  vertically shifts the Security Market Line.
C)  moves a financial asset along the Security Market Line.
D)  pushes all financial assets to the same average expected rate of return and risk level.E) All of the above
F) A) and C)

Exam 17: C: Financial Economics

One asset has a beta of 1.5 and another asset has a beta of 0.75.The difference in beta means that the asset with a beta of 0.75 has

Correct AnswerverifiedShow Answer

Maria is looking to buy one of two houses to rent out for additional income.She determines that the first house, priced at $200,000, could rent for $1,500 per month.If the second house is priced at $280,000, how much rent would Maria have to charge to get an equivalent yearly rate of return?

Correct AnswerverifiedShow Answer

Other factors constant, the future value will be smaller,

Correct AnswerverifiedShow Answer

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Correct AnswerverifiedShow Answer

Refer to the graph. An increase in the Security Market Line from SML1 to SML2 and an increase in the average expected rate of return of asset A from Y1 to Y2 would be explained by

Correct AnswerverifiedShow Answer

The U.S.federal government is unlikely to default on its bonds because

Correct AnswerverifiedShow Answer

If an investor owns a well-diversified portfolio, then

Correct AnswerverifiedShow Answer

An investor with a diversified portfolio is generally less concerned about

Correct AnswerverifiedShow Answer

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?

Correct AnswerverifiedShow Answer

When the Security Market Line shifts up, the average expected rate of return on investment assets with given risk levels is increasing.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Correct AnswerverifiedShow Answer

Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.

Correct AnswerverifiedShow Answer

Payments to holders of corporate bonds are known as dividends.

Correct AnswerverifiedShow Answer

Suppose stock A sells for $30 per share and pays dividends of $1 per share per year.Stock B sells for $40 per share and pays dividends of $2 per share per year.Through the process of arbitrage, we would expect the price of

Correct AnswerverifiedShow Answer

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P 500 are called

Correct AnswerverifiedShow Answer

Which of the following statements best reflects the concept of present value?

Correct AnswerverifiedShow Answer

The process of arbitrage

Correct AnswerverifiedShow Answer

Economic investment refers to

Correct AnswerverifiedShow Answer

Refer to the graph.The intercept of the three Security Market Lines is determined by

Correct AnswerverifiedShow Answer

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