Eco112 Chapter 17

Suppose bill has a 40 percent change of not collecting 4,000 in 1 year. If the interest rate is 12 percent, the expected value of the future payment is cloest too A. 2,143 B. 2,571 C. 2,400 D. 2,688

2,143

You purchase shares in Acme Gadget company for 20$ per share. The company believes there is a 40 percent chance they will fail to earn a discounted future profit of 2.59. The expected rate of return is closest too: A. 5.8 Percent B. 7.8 percent C. 5.2 percent D. 15.2 percent

7.8 percent

Suppose a company's bond sold for 900$ last month and this month the price is 750. The annual interest payment is 60$. The current yield on this bond is A. 6.7 percent B. 8.0 percent C. 11.11 percent D. 60 percent

8.0 percent

When investors expect greater future profits from a company, the: A. Price of the company's stock decreases B. Price of the company's bonds decreases C. Yield on the company's bonds increases D. Demand for the company's bonds increases

Demand for the company's bonds increases

The function of financial intermediaries is to tranfer purchasing power from A. Dis-savers to consumers B. Savers to dis-savers C. Consumers to savers D. Dis-savers to savers

Dis-savers to consumers

The possibility of non-payment is taken into account in the calculation of the A. Present discounted value B. Future discounted value C. Expect value D. profits

Expected value

T/F As bond prices increase, bond yields also increase

False

T/F If the opportunity cost of money was zero, the expected value of future dollars would be equal to their present value

False

Present dollars are worth more than future dollars because A. Deflation is likely B. Dollars can be exchanged for gold C. The opportunity cost of money is zero D. Income-earning investment opportunities exist

Income-earning investment opportunities exist

As interest rates increases, the opportunity costs of money A. Increases for both lender and borrower B. Increases for the borrower but not the lender C. Decreases for both lender and borrower D. Decreases for the borrower but not hte lender

Increases for both lender and borrower

The higher the expected return, or the ________ the cost of funds, the ____________ will be the amount of loan-able funds demanded A. Lower; greater B. Lower; lower C. greater;greater D. greater; lower

Lower; greater

The supply of loan-able funds is influenced by all of the following except A. Interest rates B. Risk premiums C. The desire for loanable funds D. Risk management

The desire for loanable funds

When someone purchases stock , they are buying partial ownership in A. The u.s government B. the federal reserve C. A proprietorship D. a corporation

a corporation

The price of a stock will increase when: A. there is a surplus of the stock at the current price B. he demand for the stock increases C. The supply of the stock increases D. The interest rate on bonds increases

he demand for the stock increases

T/F The present discounted value of a future payment will increase when interest rates increase

False

T/F Stock prices will increase, when the prevailing interest rate increases

False, Stock prices will decrease when the prevailing interest rate increases because the opportunity cost of holding stocks will increase , making stocks a less desirable investment option.

T/F External shocks to the stock market have little impact on stock prices since investors look at the long run when investing

False, external shocks such as a war can and do have an impact on stock prices by affecting confidence and future expectations

One reason present dollars are worth more than future dollars is that income-earning investment opportunities exist

True

T/F A risk premium compensates people who invest in risky ventures that succeed

True

T/F Financial Intermediaries change the mix of output by transferring purchasing power from savers to dissavers

True

T/F The present value of a future payment is discounted by potential interest accumulation

True

T/F When a corporation issues a bond, it is borrowing funds

True

As the interest rates increase, the tradeoff between present and future consumption A. Is not affected B. Encourages present consumption C. Changes in favor of future consumption D. Makes it less appealing to sacrifice present consumption

Changes in favor of future consumption

The term "expected value" refers to the: A future value of current payment. B. present value of future payment C. Probable value of future payment D. Different in the rates of return on risky and safe investments

Probable value of future payment

The purpose of an initial public offering is to : A. create a guaranteed source of profit for the stock owners. B. Change the membership of the company's board of directors C. Raise funds by selling shares of the company to the public D. Allow the federal reserve to borrow funds to change the money supply

Raise funds by selling shares of the company to the public

The purpose of an intial public offering is to A. Raise funds for investment and growth by selling shares of the company to the public. B. change the membership of the board of directors C. Borrows funds for investment and growth D. See if there is a deman for a company's new product

Raise funds for investment and growth by selling shares of the company to the public.

Higher interest rates : A. reflect a lower opportunity cost of money B. Reduce the availability of loan-able funds C. Raise the present value of future payments D. Raise the future value of current dollars

Raise the future value of current dollars

Financial intermediaries: A. Reduce search and information costs for savers and investors B. Transfer purchasing power from spenders to savers C. Concentrate investment risk D. Make lending less efficient because of all the paperwork

Reduce search and information costs for savers and investors

The present discounted value of a future payment will increase when A. Risk of non-payment decrease B. Interest rate increases C. Future payment is further into the future D. Opportunity cost of money decreases

Opportunity cost of money decreases

A motivation for holding stocks is to: A. receive interest payments n the firm's debt B. receive potential capital gains C. Have a direct role in the operation of th corporation D. Receive the guaranteed profit over time

receive potential capital gains