Question 1

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

Question 2

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Accepted Answer

A) True 
 B)False

Question 3

An asset's price and rate of return

Accepted Answer

A)  are independent of each other.
B)  can be either inversely or directly related.
C)  are inversely related.
D)  are directly related.E) A) and D)
F) C) and D)

Question 4

Susan recently purchased a home for $150,000.She plans to rent it out for $1,000 per month for a year.Had the house cost $200,000 instead, her expected rate of return would have

Accepted Answer

A)  decreased by 1 percentage point.
B)  decreased by 2 percentage points.
C)  increased by 2 percentage points.
D)  increased by 3 percentage points.E) B) and C)
F) A) and D)

Question 5

Which of the following financial assets is considered to be essentially risk-free?

Accepted Answer

A)  gold
B)  stock in Fortune 500 companies
C)  real estate
D)  short-term U.S.government bondsE) A) and B)
F) A) and C)

Question 6

Compound interest describes increases in value when interest is paid, or compounded, on

Accepted Answer

A)  only the original amount invested.
B)  only the previously accumulated interest payments.
C)  the original amount invested and previously accumulated interest payments.
D)  the original amount invested minus any previously accumulated interest payments.E) None of the above
F) A) and B)

Question 7

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Accepted Answer

A) True 
 B)False

Question 8

Nondiversifiable risk refers to potential losses from

Accepted Answer

A)  random fluctuations in specific stocks.
B)  bad company policies.
C)  portfolio management fraud.
D)  events that move all investments in the same direction.E) B) and C)
F) A) and D)

Question 9

The limited liability rule means that if a corporation goes bankrupt,

Accepted Answer

A)  shareholders are responsible for all the debts of the firm.
B)  bondholders are responsible for all the debts of the firm.
C)  shareholders can only lose the amount they invested.
D)  bondholders only lose the face value of the bond.E) None of the above
F) All of the above

Question 10

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Accepted Answer

A)  Less risky assets will have similar average expected rates of return to more risky assets.
B)  Less risky assets will have higher average expected rates of return than more risky assets.
C)  More risky assets will have higher average expected rates of return than less risky assets.
D)  More risky assets will have lower average expected rates of return than less risky assets.E) All of the above
F) C) and D)

Question 11

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond

Accepted Answer

A)  is $110.
B)  is $125.
C)  is $140.
D)  depends on rates of return she could earn on other, similar investments.E) None of the above
F) A) and B)

Question 12

Limited liability rules

Accepted Answer

A)  mean that bankrupt companies owe nothing to corporate bondholders.
B)  discourage investment in corporate stock.
C)  help prevent corporate fraud.
D)  encourage stock investing by limiting shareholder risk of loss.E) A) and C)
F) B) and C)

Question 13

Rick recently purchased a convenience store for $500,000.He expects monthly profits to be $10,000 in the next year.If a recession had struck, Rick had instead paid $300,000, and his monthly profits were reduced to $6,000, his expected rate of return would have

Accepted Answer

A)  increased by 2 percentage points.
B)  increased by 3 percentage points.
C)  decreased by 2 percentage points.
D)  remained the same.E) B) and D)
F) A) and D)

Question 14

An expansionary monetary policy will shift the Security Market Line down.

Accepted Answer

A) True 
 B)False

Question 15

A change in Federal Reserve monetary policy will

Accepted Answer

A)  have no effect on the Security Market Line.
B)  invert the Security Market Line.
C)  change the slope of the Security Market Line.
D)  cause a vertical shift of the Security Market Line.E) B) and D)
F) All of the above

Question 16

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Accepted Answer

A)  $38,050
B)  $39,516
C)  $40,323
D)  $42,108E) A) and B)
F) None of the above

Question 17

A mutual fund company uses the funds of its investors to

Accepted Answer

A)  produce goods and services for consumers.
B)  buy stocks and bonds.
C)  build factories and other infrastructure.
D)  buy capital and other resources for other firms.E) A) and B)
F) A) and C)

Question 18

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

Question 19

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 20

If the Federal Reserve conducts an open-market purchase, then the SML will

Accepted Answer

A)  shift up.
B)  shift down.
C)  rotate and become steeper.
D)  rotate and become flatter.E) A) and D)
F) None of the above

Exam 37: Financial Economics

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

Compound interest describes increases in value when interest is paid, or compounded, on

Correct AnswerverifiedShow Answer

Arbitrage equalizes rates of return across similar investments because

Correct AnswerverifiedShow Answer

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Correct AnswerverifiedShow Answer

The limited liability rule means that if a corporation goes bankrupt,

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

Which of the following financial assets is considered to be essentially risk-free?

Correct AnswerverifiedShow Answer

Susan recently purchased a home for $150,000.She plans to rent it out for $1,000 per month for a year.Had the house cost $200,000 instead, her expected rate of return would have

Correct AnswerverifiedShow Answer

A mutual fund company uses the funds of its investors to

Correct AnswerverifiedShow Answer

A change in Federal Reserve monetary policy will

Correct AnswerverifiedShow Answer

An expansionary monetary policy will shift the Security Market Line down.

Correct AnswerverifiedShow Answer

Limited liability rules

Correct AnswerverifiedShow Answer

Nondiversifiable risk refers to potential losses from

Correct AnswerverifiedShow Answer

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Correct AnswerverifiedShow Answer

Rick recently purchased a convenience store for $500,000.He expects monthly profits to be $10,000 in the next year.If a recession had struck, Rick had instead paid $300,000, and his monthly profits were reduced to $6,000, his expected rate of return would have

Correct AnswerverifiedShow Answer

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond

Correct AnswerverifiedShow Answer

If the Federal Reserve conducts an open-market purchase, then the SML will

Correct AnswerverifiedShow Answer

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Correct AnswerverifiedShow Answer

An asset's price and rate of return

Correct AnswerverifiedShow Answer

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified