Question 1

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) A) and B)
F) None of the above

Question 2

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons.His expected rate of return per year on the bond is

Accepted Answer

A)  4 percent.
B)  7 percent.
C)  10 percent.
D)  12 percent.E) C) and D)
F) B) and C)

Question 3

Arbitrage is the process by which investors simultaneously sell

Accepted Answer

A)  assets with higher rates of return and buy otherwise identical assets with lower rates of return.
B)  assets with lower rates of return and buy otherwise identical assets with higher rates of return.
C)  riskier assets and buy less risky assets.
D)  less risky assets and buy riskier assets.E) B) and C)
F) A) and C)

Question 4

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

Accepted Answer

A) True 
 B)False

Question 5

Refer to the graph.Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a financial asset?

Accepted Answer

A)  line A
B)  line B
C)  line C
D)  none of theseE) B) and D)
F) B) and C)

Question 6

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

Accepted Answer

A)  present value
B)  future value
C)  compound interest
D)  real rate of interestE) A) and C)
F) A) and B)

Question 7

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

Question 8

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

Accepted Answer

A)  diversification.
B)  arbitrage.
C)  hedging.
D)  securitization.E) B) and C)
F) A) and D)

Question 9

Future value measures the present-day value of returns or costs expected to arrive in the future.

Accepted Answer

A) True 
 B)False

Question 10

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) C) and D)
F) All of the above

Question 11

Which one of the following is an example of a financial investment but not an economic investment?

Accepted Answer

A)  renovating a shopping mall
B)  constructing an addition to a petroleum refinery
C)  building a new store
D)  buying gold to sell later at a higher priceE) A) and D)
F) C) and D)

Question 12

A bond that pays no annual interest (or coupons)  and has a face value at maturity will fetch a price today that is equal to the

Accepted Answer

A)  future value of its face value.
B)  number of years in the life of the bond times its face value.
C)  present value of the number of years in the life of the bond times its face value.
D)  present value of its face value.E) A) and D)
F) B) and C)

Question 13

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

Question 14

Rates of return on short-term U.S.government bonds are compensation for

Accepted Answer

A)  both the level of risk and the delaying of consumption.
B)  delaying consumption only.
C)  the level of risk only.
D)  factors other than risk and delaying consumption.E) A) and D)
F) A) and C)

Question 15

Arbitrage equalizes rates of return across similar investments because

Accepted Answer

A)  arbitrage also equalizes the prices of the assets.
B)  investors prefer diversity.
C)  investors will want to replace lower rate of return assets with those generating higher rates of return.
D)  investors will want to replace higher rate of return assets with those generating lower rates of return.E) A) and B)
F) A) and C)

Question 16

Financial investment refers to

Accepted Answer

A)  the same idea as economic investment.
B)  earning profits from producing goods and services.
C)  purchasing or building an asset for monetary gain.
D)  making new additions to the capital stock.E) All of the above
F) None of the above

Question 17

Short-term U.S.government bonds are considered to be risk-free.

Accepted Answer

A) True 
 B)False

Question 18

Compound interest

Accepted Answer

A)  describes how quickly an interest-bearing asset increases in value.
B)  measures the rate of return of a portfolio of stocks and bonds.
C)  measures the after-tax, inflation-adjusted rate of interest.
D)  refers to the multiple rates of interest of various types of bonds in a portfolio.E) All of the above
F) A) and B)

Question 19

The "time value" of money is based on the fact that prices may increase over time.

Accepted Answer

A) True 
 B)False

Question 20

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Accepted Answer

A)  index funds require more buying and selling to generate their returns.
B)  management and trading costs reduce the returns of actively managed funds.
C)  index funds spend more on research and management.
D)  diversification is more important to actively managed funds.E) C) and D)
F) B) and C)

Exam 17: Part 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

Refer to the graph.Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a financial asset?

Correct AnswerverifiedShow Answer

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons.His expected rate of return per year on the bond is

Correct AnswerverifiedShow Answer

Short-term U.S.government bonds are considered to be risk-free.

Correct AnswerverifiedShow Answer

Arbitrage is the process by which investors simultaneously sell

Correct AnswerverifiedShow Answer

The "time value" of money is based on the fact that prices may increase over time.

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

Future value measures the present-day value of returns or costs expected to arrive in the future.

Correct AnswerverifiedShow Answer

Which one of the following is an example of a financial investment but not an economic investment?

Correct AnswerverifiedShow Answer

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

Correct AnswerverifiedShow Answer

Compound interest

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Rates of return on short-term U.S.government bonds are compensation for

Correct AnswerverifiedShow Answer

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

Correct AnswerverifiedShow Answer

Financial investment refers to

Correct AnswerverifiedShow Answer

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

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Arbitrage equalizes rates of return across similar investments because

Correct AnswerverifiedShow Answer

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Correct AnswerverifiedShow Answer

What do stocks represent?

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

A bond that pays no annual interest (or coupons) and has a face value at maturity will fetch a price today that is equal to the

Correct AnswerverifiedShow Answer

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