Quiz #9

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?

$16

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

$7,920.94.

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

$859.09

Laila knows that she has about $126 in her bank account. She knows she earned an interest rate of 3 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

$122.33

Which of the following is correct concerning stock market irrationality?

Speculative bubbles could arise, in part, because the price that people pay for stock depends on what they think someone else will pay for it in the future.

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

no greater than 10.83 percent.

The future value of a deposit in a savings account will be larger

the longer a person waits to withdraw the funds.

Which of the following changes would increase the present value of a future payment?

A decrease in the interest rate

Suppose your uncle offers you $100 today or $136 in 5 years. You would prefer to take the $100 today if the interest rate is

7 percent.

Which of the following is a source of market risk?

Real GDP varies over time and sales and profits move with real GDP.

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

The six-year account at 3 percent

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

an insurance company.

Refer to Table 27-1. If Jin's current wealth is $61,000, then

his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Jin is risk averse.

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

marginal utility diminishes as wealth rises, so he must be risk averse.

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

speculative bubble.

Rory has purchased a product from an insurance company that requires the insurance company to pay him $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called

an annuity.

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 + .04)10

Daniel puts $9,000 into each of two different assets. The first asset pays 20 percent interest and the second pays 10 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 7 years?

$18,000

Amari deposited $2,000 into an account two years ago. The first year he earned 8 percent interest; the second year he earned 4 percent. How much money does Amari have in his account today?

$2,246.40

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

$500/(1 + r) + $10,500/(1 + r)2

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

1 to 10.

Tyler puts $450 into an account when the interest rate is 8 percent. Later he checks his balance and finds he has about $612.22. How long did Tyler wait to check his balance?

4 years

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

7

A judge requires Hoa to make a payment to Parker. The judge says that Hoa can pay her either $10,000 today or $11,500 two years from today. Of the following interest rates, which is the highest one at which Hoa would be better off paying the money today?

7 percent

Sanjay would like to double the money in his retirement account in ten years. According to the rule of 70, what rate of interest would he need to earn to attain his objective?

7 percent

Laila recently received an inheritance, and she is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the highest risk?

A portfolio with an average annual rate of return of 11%.

Refer to Figure 27-2. From the appearance of Alex's utility function, we know that

Alex is not risk averse.

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.

Refer to Figure 27-1. Suppose Jasmine begins with $420 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

If it is "heads," she wins $160; if it is tails, she loses $160.

Which of the following best illustrates diversification?

Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services.

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Interest rates rise and truck prices rise.

Refer to Figure 27-1. From the appearance of the utility function, we know that

Jasmine would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.

Parker says that the present value of $350 to be received one year from today if the interest rate is 6 percent is less than the present value of $350 to be received two years from today if the interest rate is 3 percent. Ryan says that $350 saved for one year at 6 percent interest has a smaller future value than $350 saved for two years at 3 percent interest.

Only Ryan is correct.

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 following makes the price of FineLine Corporation Stock fall?

Only the interest rate rising

Which of the following actions best illustrates moral hazard?

Roberto buys home owners insurance and then is less careful to make sure he's put out his cigarettes.

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in his retirement account. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Stan

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?

The announcement but not the rise in interest rates

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Victor's but not Irene's

Recently, Mina's wealth increased by $400. If her wealth were to increase by another $400 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, and graphing wealth on each horizontal axis, Mina's utility function

is upward sloping and her marginal utility function is downward sloping.

Ahmet decided to increase the number of stocks in his portfolio. In doing so, Ahmet reduced

the firm-specific risk, but not the market risk of his portfolio.

For a risk averse person,

the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.

On a graph with utility on the vertical axis and wealth on the horizontal axis, diminishing marginal utility of wealth implies that the utility function is

upward-sloping and has decreasing slope.

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

About 7 years