Question 1

Debt contracts (also called instruments)  issued by government and corporations are known as

Accepted Answer

A)  bonds.
B)  stocks.
C)  real assets.
D)  federally insured deposits.E) B) and D)
F) C) and D)

Question 2

Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000.What is Pigou's per-year rate of return?

Accepted Answer

A)  4.8 percent
B)  9.8 percent
C)  20 percent
D)  39.2 percentE) All of the above
F) A) and C)

Question 3

Which of the following is common to all investments?

Accepted Answer

A)  The investment pays interest.
B)  Some price must be paid to acquire them.
C)  Owners are guaranteed future payments.
D)  Government insurance backs them.E) A) and B)
F) B) and C)

Question 4

The primary risk that bondholders face is that

Accepted Answer

A)  the bond will reduce in price.
B)  the bond issuer will default.
C)  inflation will decrease.
D)  the rate of return will increase.E) A) and D)
F) All of the above

Question 5

The so-called risk-free rate essentially measures the investors'

Accepted Answer

A)  risk aversion.
B)  risk preference.
C)  time preference.
D)  expected rate of return.E) All of the above
F) None of the above

Question 6

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) C) and D)
F) B) and D)

Question 7

George buys an antique car for $20,000 and sells it five years later for just over $24,000.George's per-year rate of return is

Accepted Answer

A)  20 percent.
B)  12 percent.
C)  10 percent.
D)  4 percent.E) B) and C)
F) C) and D)

Question 8

The Security Market Line depicts the relationship between the

Accepted Answer

A)  average expected rate of return on stocks and the average expected rate of return on bonds.
B)  average expected rate of return of a financial asset and the discount rate.
C)  risk level of a financial asset and the prime interest rate.
D)  average expected rate of return and risk level of a financial asset.E) A) and D)
F) None of the above

Question 9

Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at the end of the year for $390,000.Lucian's rate of return

Accepted Answer

A)  is 2 percent.
B)  is 4.5 percent.
C)  is negative 2.5 percent.
D)  cannot be determined.E) B) and D)
F) All of the above

Question 10

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Accepted Answer

A) True 
 B)False

Question 11

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately

Accepted Answer

A)  1.3 percent.
B)  2 percent.
C)  5 percent.
D)  20 percent.E) B) and D)
F) B) and C)

Question 12

Time value of money refers to the idea that a specific amount of money

Accepted Answer

A)  can be converted into other currencies in the foreign exchange market.
B)  is needed to purchase goods and services.
C)  is more valuable the sooner it is received.
D)  can buy less goods and services if inflation occurs over time.E) A) and C)
F) All of the above

Question 13

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Accepted Answer

A)  higher returns.
B)  more likely outcomes.
C)  higher risks.
D)  smaller returns.E) None of the above
F) A) and B)

Question 14

Diversifiable risk refers to risk

Accepted Answer

A)  faced by a portfolio in general.
B)  that can be reduced with appropriate fiscal and monetary policy.
C)  posed by business cycle fluctuations.
D)  specific to a particular investment.E) A) and B)
F) A) and C)

Question 15

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in five years.If the interest rate is 5 percent, then that asset will be worth $75 million today.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Another name for diversifiable risk is

Accepted Answer

A)  systemic risk.
B)  inflation risk.
C)  idiosyncratic risk.
D)  cyclical risk.E) A) and D)
F) C) and D)

Question 18

The average expected rate of return on most financial assets is the sum of the rates that compensate for

Accepted Answer

A)  nondiversifiable risk and time preference.
B)  diversifiable risk and time preference.
C)  nondiversifiable and diversifiable risk.
D)  nondiversifiable and diversifiable risk, and time preference.E) A) and B)
F) None of the above

Question 19

Arbitrage causes all financial assets

Accepted Answer

A)  of the same risk level to have the same price.
B)  to have the same expected rate of return.
C)  to have the same beta.
D)  of the same risk level to have the same average expected rate of return.E) C) and D)
F) None of the above

Question 20

(Advanced analysis)  Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Accepted Answer

A)  4.8 percent
B)  5.2 percent
C)  5.7 percent
D)  6.2 percentE) All of the above
F) B) and D)

Exam 17: C: Financial Economics

Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000.What is Pigou's per-year rate of return?

Correct AnswerverifiedShow Answer

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Correct AnswerverifiedShow Answer

The primary risk that bondholders face is that

Correct AnswerverifiedShow Answer

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in five years.If the interest rate is 5 percent, then that asset will be worth $75 million today.

Correct AnswerverifiedShow Answer

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Correct AnswerverifiedShow Answer

The Security Market Line depicts the relationship between the

Correct AnswerverifiedShow Answer

Another name for diversifiable risk is

Correct AnswerverifiedShow Answer

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Correct AnswerverifiedShow Answer

Debt contracts (also called instruments) issued by government and corporations are known as

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

Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at the end of the year for $390,000.Lucian's rate of return

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

Diversifiable risk refers to risk

Correct AnswerverifiedShow Answer

George buys an antique car for $20,000 and sells it five years later for just over $24,000.George's per-year rate of return is

Correct AnswerverifiedShow Answer

The so-called risk-free rate essentially measures the investors'

Correct AnswerverifiedShow Answer

Which of the following is common to all investments?

Correct AnswerverifiedShow Answer

Arbitrage causes all financial assets

Correct AnswerverifiedShow Answer

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately

Correct AnswerverifiedShow Answer

Time value of money refers to the idea that a specific amount of money

Correct AnswerverifiedShow Answer

The average expected rate of return on most financial assets is the sum of the rates that compensate for

Correct AnswerverifiedShow Answer

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