Econ hw 9

19) Traditional banks have equity to absorb credit losses, while P2P are just tech platforms not posting capital, we would expect a. P2P loans to be riskier b. P2P loans to offer lower lending rates c. P2P loans to attract the best borrowers d. None of the above is right f. All of the above are right

a. P2P loans to be riskier

18) If more people think a corporation's stock is overvalued than think it is undervalued then there is a a. surplus, so its price will rise. b. surplus, so its price will fall. c. shortage, so its price will rise. d. shortage, so its price will fall.

b. surplus, so its price will fall.

12) An increase in the number of corporations in a portfolio from 110 to 120 reduces a. market risk by more than an increase from 1 to 10. b. market risk by less than an increase from 1 to 10. c. firm-specific risk by more than an increase from 1 to 10. d. firm-specific risk by less than an increase from 1 to 10.

d. firm-specific risk by less than an increase from 1 to 10.

1) Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is a. no less than 9.48 percent. b. no greater than 9.48 percent. c. no less than 10.83 percent. d. no greater than 10.83 percent.

d. no greater than 10.83 percent. Because if it is higher than that then you want to save in the bank because you'll make more mula (11% percent for example would be more than 10,000 in 5 year) 5980.17 (1+r)^5 >10,000

Standard Deviation --- risk adverse do you want high or low?

low because it is less risky

3) A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest? a. The first is lowest; the second is highest. b. The second is lowest; the third is highest. c. The third is lowest; the fourth is highest. d. The fourth is lowest; the first is highest.

b. The second is lowest; the third is highest. 18000 today- 1800 19000 one year - 1792.45 20300 two year - 18066.92 21500 three year - 18,051.81 int rt- 6%

17) An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer. It is widely believed that the presence of this individual will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise? a. the announcement and the rise in interest rates b. the announcement but not the rise in interest rates c. the rise in interest rates, but not the announcement d. neither the announcement nor the rise in interest rates

b. the announcement but not the rise in interest rates

15) Suppose that John can buy a savings bond for $500 that matures in ten years and pays John $1,000 with certainty. He is indifferent between this bond and another $500 bond that has some risk but on which the interest rate is 5% higher. How much, to the nearest penny, does the riskier bond pay in ten years? a. $1,275.91 b. $1,422.63 c. $1,577.69 d. $1,631.17

c. $1,577.69 500 (1+r)^10 = 10000 500 (1+(r+.05))^10 = ?

4) Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn? a. 5 percent b. 7 percent c. 10 percent d. 14 percent

c. 10 percent the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable 140/ x = 14

13) A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was a. 9% but not 10% b. 10% but not 11% c. 11% but not 12% d. None of the above is correct; a risk averse person would not accept any of the above bets.

c. 11% but not 12% If you are risk averse, the pain of losing $1000 would exceed the pleasure of winning $1000. Since both outcomes are equally likely, you should not take this gamble

10) Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent a. chance of winning $120 in two years and the interest rate was 11%. b. chance of winning $114 in two years and the interest rate was 7%. c. chance of winning $110 in two years and the interest rate was 3%. d. None of the above are correct; a risk averse person would not accept any of the above bets.

c. chance of winning $110 in two years and the interest rate was 3%.

16) Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of FineLine Corporation Stock fall? a. both the interest rate rising and the revenue announcement b. neither the interest rate rising nor the revenue announcement c. only the interest rate rising d. only the revenue announcement

c. only the interest rate rising

14) Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse? a. $907.03 to be paid in two years b. $1,000.01 to be paid in two years c. $1,100.01 to be paid in two years d. $1,102.51 to be paid in two years

d. $1,102.51 to be paid in two years

5) Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $5,000 or (2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is a. 2 percent, but not if the interest rate is 3 percent. b. 3 percent, but not if the interest rate is 4 percent. c. 4 percent, but not if the interest rate is 5 percent. d. 5 percent, but not if the interest rate is 6 percent.

d. 5 percent, but not if the interest rate is 6 percent. 1) 5000 2) 2700 - 1 yr 2700- 2 yr

2) Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle? a. 5 percent b. 6 percent c. 7 percent d. 8 percent

d. 8 percent 140/(1+r) + 140/ (1+r)^2 = 249.66 similar example: Suppose r = 0.06. Should General Motors spend $100 million to build a factory that will yield $200 million in ten years? Solution: Find present value of $200 million in 10 years: PV = ($200 million)/(1.06)10 = $112 million Since PV > cost of factory, GM should build it. Present value formula: PV = FV/(1 + r )^n

11) Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct? a. It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. b. Stock prices, even if not exactly a random walk, are very close to it. c. Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis. d. All of Chloe's conclusions are correct.

d. All of Chloe's conclusions are correct.