ECON 212 - Chapter 14
Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?
$100 * (1 + 0.04)^10
You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?
$9,090.91
Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?
10%
Suppose the interest rate is 5 percent. Consider three payment options: 1. $500 today. 2. $520 one year from today. 3. $550 two years from today. Which of the following is correct?
2 has the lowest present value and 1 has the highest.
A risk-averse person has
A utility function whose slope gets flatter as wealth rises. This means they gave diminishing marginal utility of wealth.
John has been a sky diver for many years. When the company John works for offers its employees the option to purchase a life insurance policy, John purchases a policy. This illustrates the problem of a. moral hazard. b. adverse selection. c. risk-return tradeoff. d. diversification.
Adverse Selection
Figure 27-5 The figure shows a utility function for Dexter. Refer to Figure 27-5. From the appearance of the utility function, we know that
Dexter is risk averse
Which of the following is not correct?
Insurance markets reduce risk, but not by diversification
A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should
Lower the price and lower the present value of the corporation's stock.
According to the efficient markets hypothesis, worse-than-expected news about a corporation will
Lower the price of the stock
Figure 27-1 The figure shows a utility function. Refer to Figure 27-1 the utility function that is shown exhibits the property of diminishing
Marginal Utility
What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?
One of these -$105.26 -$97.24 -$94.34
Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?
One of these -$580 two years from today $600 three years from today $615 four years from today
According to the efficient markets hypothesis,
One of these -Changes in the prices of stocks are predicable. Evidence shows that managed funds typically do better than indexed funds. -Changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds. -Changes in the price of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.
The possibility of speculative bubbles in the stock market arises in part because
One of these -Stock prices may not depend at all on psychological factors -Fundamental analysis may be the correct way to evaluate the value of stocks -Future streams of dividend payments are very hard to estimate.
Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied
One of these -rise, and investment spending rise -rise, and investment spending fall -fall, and investment spending fall
Figure 27-5 The figure shows a utility function for Paul. Refer to Figure 27-5. Suppose the vertical distance between the points (0,A) and (0,B) is 10. If his wealth increased from $700 to $900, then
Paul's utility would increase by less than 10 units
The utility function of a risk-averse person has a
Positive slope but gets flatter as wealth increases
Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?
Speculative bubble
Figure 27-1 The figure shows a utility function. Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?
The distance between point B and point C
A previously well-respected and trusted president of a corpo is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?
The fall in interest rates, but not the announcement
An asset market is said to experience a speculative bubble when
The price of the asset rises above what appears to be its fundamental value
Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value
This stock is overvalued; you shouldn't considered adding it to your portfolio
James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if
X = 1,360.86
