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

Question 2

The terms "economic investment" and "ﬁnancial investment" can be used synonymously.

Accepted Answer

A) True 
 B)False

Question 3

The average expected rate of return of a ﬁnancial asset equals

Accepted Answer

A)   the rate that compensates for time preference plus the rate that compensates for risk.
B)   the rate that compensates for time preference plus the rate of inﬂation.
C)   beta plus the rate that compensates for risk.
D)   the risk-free interest rate plus the rate of inﬂation.E) None of the above
F) A) and B)

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 B)
F) A) and C)

Question 5

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

Question 7

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

Accepted Answer

A)   if necessary, it can print the money needed to make payments on time.
B)   its bond payments are insured.
C)   the U.S. federal budget usually runs a surplus, providing ample funds for repaying debt.
D)   of all of these.E) None of the above
F) B) and C)

Question 8

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

Accepted Answer

A)   $205
B)   $210
C)   $240
D)   $300E) A) and B)
F) None of the above

Question 9

The average expected rate of return on an asset can be fully understood as the rate that
compensates for risk.

Accepted Answer

A) True 
 B)False

Question 10

The rise of mutual funds has radically changed the way corporations are controlled in that

Accepted Answer

A)   it shifted ownership away from individual investors toward "institutional" investors like mutual funds.
B)   mutual funds increased the percentage of corporate shares owned by individual investors.
C)   corporate ownership became restricted to a select few.
D)   it reduced the share of private ownership and increased the share of public (government)  ownership.E) B) and C)
F) A) and C)

Question 11

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 C)
F) None of the above

Question 12

The formula for present value allows investors to

Accepted Answer

A)   convert a given number of dollars in the future into its present equivalent.
B)   determine the future impact of inﬂation on a present amount of money.
C)   know which ﬁnancial assets will provide the greatest future returns.
D)   do all of these.E) None of the above
F) C) and D)

Question 13

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) B) and D)

Question 14

A bond that is currently selling at $1,000 offers to pay $50 annually. What is the percentage rate of return on the bond?

Accepted Answer

A)   5 percent
B)   10 percent
C)   20 percent
D)   50 percentE) B) and C)
F) None of the above

Question 15

If an asset has a risk-return combination that is below the Security Market Line (SML) , then this indicates that the asset's

Accepted Answer

A)   expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio.
B)   expected rate of return is higher than could be had from some combination of the risk-free asset and the market portfolio.
C)   price will rise as arbitrage proceeds in the market.
D)   risk will rise as arbitrage proceeds in the market.E) B) and D)
F) A) and C)

Question 16

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Accepted Answer

A)   increase, and the rates of return would decrease relative to other companies.
B)   decrease, and the rates of return would increase relative to other companies.
C)   decrease, but the rates of return would stay the same relative to other companies.
D)   decrease, and the rates of return would decrease relative to other companies.E) A) and B)
F) A) and C)

Question 17

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

Question 18

The estimated value of all ﬁnancial assets held by U.S. households in 2017 was about

Accepted Answer

A)   $8.1 trillion.
B)   $17.9 trillion.
C)   $54 trillion.
D)   $82 trillion.E) All of the above
F) A) and B)

Question 19

Explain the logic behind the fact that if the Federal Reserve raises the risk-free interest rate, return
rates of other assets must rise by the same amount.

Accepted Answer

When the Federal Reserve raises the risk...

Question 20

An investment with a beta of 4.0 means that the investment has four times the

Accepted Answer

A)   average expected rate of return of the market portfolio.
B)   risk of all similar investments.
C)   level of nondiversiﬁable risk as the market portfolio.
D)   level of diversiﬁable risk as the market portfolio.E) C) and D)
F) A) and D)

Exam 17: Financial Economics

The rise of mutual funds has radically changed the way corporations are controlled in that

Correct AnswerverifiedShow Answer

A bond that is currently selling at $1,000 offers to pay $50 annually. What is the percentage rate of return on the bond?

Correct AnswerverifiedShow Answer

The average expected rate of return of a ﬁnancial asset equals

Correct AnswerverifiedShow Answer

Explain the logic behind the fact that if the Federal Reserve raises the risk-free interest rate, return rates of other assets must rise by the same amount.

Correct AnswerverifiedWhen the Federal Reserve raises the risk...View AnswerShow Answer

The formula for present value allows investors to

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The estimated value of all ﬁnancial assets held by U.S. households in 2017 was about

Correct AnswerverifiedShow Answer

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Correct AnswerverifiedShow Answer

If an asset has a risk-return combination that is below the Security Market Line (SML) , then this indicates that the asset's

Correct AnswerverifiedShow Answer

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An investment with a beta of 4.0 means that the investment has four times the

Correct AnswerverifiedShow Answer

The terms "economic investment" and "ﬁnancial investment" can be used synonymously.

Correct AnswerverifiedShow Answer

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

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

The primary risk that bondholders face is that

Correct AnswerverifiedShow Answer

The process of arbitrage

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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

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

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

Correct AnswerverifiedShow Answer

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Correct AnswerverifiedShow Answer

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When the Federal Reserve raises the risk...
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