Deck 15: Web: Financial Decision Making

Question 1

The thing you must give up in the future to consume something today is known as the _____of consuming now.

A) opportunity cost
B) variable cost
C) average cost
D) sunk cost

Answer 1

opportunity cost

Question 2

The growth process that causes investments to appreciate in value over many years is referred to as_____.

A) sniping
B) hedging
C) revaluating
D) compounding

Answer 2

compounding

Question 3

An investor's principal is _____.

A) the value of her initial investment
B) the final balance she has in her account after a period of time
C) the amount she earns on her investment
D) the tax she pays on her interest income

Answer 3

the value of her initial investment

Question 4

John had $2,000 in his account at the beginning of 2009. At the end of the year, the account had $2,002. The rate of return on the account is _____.

A) 0.02%
B) 0.1%
C) 2%
D) 10%

Question 5

If Mary had $500 in her bank account at the beginning of 2010, she would have a final balance of _____after a year if the rate of return is 5%.

A) $505
B) $525
C) $550
D) $555

Question 6

Philip invested $800 for a period of one year at a rate of interest of 6%, the return on his investment is _____.

A) $48
B) $80
C) $60
D) $88

Question 7

Ron had $100 in his bank account in 2008. He will have a final balance of _____after 3 years if the rate of return is 1%.

A) $101.01
B) $103.03
C) $130
D) $300

Question 8

The time delay between the initial investment and the final withdrawal is referred to as the _____.

A) effectiveness lag
B) problem of time inconsistency
C) holding period
D) implementation lag

Question 9

Mr. Brown had deposited a sum of money in a bank at an interest of 5%. If he got back $4,725 after 1 year, what was his principal?

A) $945
B) $1,000
C) $4,500
D) $4,700

Question 10

Mark invested an amount of $1,500 for a period of 2 years at a rate of interest of 5%. In order to have a final balance of $1,653.75, Mark should_____.

A) consume the interest earned at the end of each year
B) reinvest the interest earned at the end of the first year
C) withdraw his principal at the end of the first year
D) invest $100 at the end of the first year

Question 11

Which of the following reduces the buying power of the final balance in an investor's account?

A) A rise in the aggregate price level
B) A rise in domestic interest rates
C) An appreciation of the domestic currency
D) A decrease in money supply

Question 12

Which of the following is likely to be true if the inflation rate is positive in an economy?

A) The purchasing power of the returns from investments are likely to decline.
B) The purchasing power of the returns from investments are likely to increase.
C) The nominal interest rates are likely to decline.
D) The real money supply is likely to increase.

Question 13

The real rate of return on an investment is obtained by_____.

A) subtracting the long-run inflation rate from the nominal rate of return
B) adding the long-run inflation rate to the nominal rate of return
C) multiplying the long-run inflation rate with the nominal rate of return
D) dividing the nominal rate of return by the long-run inflation rate

Question 14

If the nominal rate of return on an investment is 7.5% and the real rate of return is 5.2%, the long-run average inflation rate is _____.

A) 1.44%
B) 2.3%
C) 12.7%
D) 21.5%

Question 15

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment.

-Refer to the scenario above. Mr. X will have a final balance of ____at the end of two years.

A) $5,300
B) $5,618
C) $10,600
D) $18,024

Question 16

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment.

-Refer to the scenario above. If the long-run inflation rate in the economy is 3.4%, the real rate of return on his investment will be____.

A) 1.77%
B) 2.6%
C) 9.4%
D) 20.4%

Question 17

Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment.

-Refer to the scenario above. If the long-run average inflation rate is 3%, the real value of his investment in today's dollars is ____.

A) $5,304.50
B) $5,618.00
C) $10,430.50
D) $15,612.00

Question 18

Bonds, stocks, and other financial claims that can be traded among investors are called _____.

A) units of account
B) principal
C) equity
D) securities

Question 19

_____ are long-term loans made to a borrower by a lender.

A) Bonds
B) Patents
C) Trademarks
D) Coupons

Question 20

If the market interest rate rises,_____.

A) the value of a previously issued bond falls
B) the value of a previously issued bond increases
C) the market price for bonds increases
D) the demand for bonds decreases

Question 21

If the market interest rate rises, _____.

A) the present value of future payments increases
B) the supply of bonds decreases
C) the market price for bonds decreases
D) the demand for bonds decreases

Question 22

Which of the following will happen if market interest rates rise at present?

A) The quantity demanded of previously issued bonds will decrease.
B) The supply of bonds will increase.
C) The market prices of bonds will increase.
D) The present value of future payments will increase.

Question 23

If the market interest rate falls,_____.

A) the value of a previously issued bond falls
B) the value of a previously issued bond increases
C) the market price for bonds decreases
D) the demand for bonds increases

Question 24

If the market interest rate falls, _____.

A) the present value of future payments decreases
B) the supply of bonds decreases
C) the market price for current bonds increase
D) the demand for bonds increases

Question 25

Which of the following is true of bonds?

A) Bonds are short term loans.
B) Bonds are riskier than money market accounts.
C) Bonds pay lower returns than treasury bills.
D) Bonds have a fixed value.

Question 26

Identify the correct statement about bonds.

A) Bonds are short term loans.
B) Bonds have a fixed value.
C) Bonds are less risky than money market accounts.
D) Bonds pay higher returns compared to treasury bills.

Question 27

_____ are ownership rights in a corporation.

A) Bonds
B) Shares
C) Treasury bills
D) Mutual funds

Question 28

Which of the following is true of shares of stock?

A) Shares of stock are riskier than bonds.
B) Share values can be negative.
C) Share prices cannot be zero.
D) Bonds are riskier than shares of stocks.

Question 29

Shareholders:

A) have limited liability.
B) have unlimited control over a company?s assets.
C) are contractually obligated to pay premiums to corporations.
D) are entitled to a fixed payment at the end of a pre-determined period.

Question 30

Identify the correct statement.

A) A company is contractually required to pay interest to bondholders before paying the shareholders.
B) A company is contractually required to pay a fixed amount to shareholders after a certain period.
C) A company relies entirely on its shareholders to pay off its debts in case of a financial crisis.
D) A company stops paying its bondholders but continues paying its shareholders in case of a crisis.

Question 31

Which of the following is a difference between a share and a bond?

A) A share of stock is a short term loan while a bond is a long term loan.
B) A share of stock pays a low return while a bond pays a high return.
C) The return on a share of stock varies while the return on a bond is fixed.
D) A share of stock usually has a maturity date while a bond does not have a maturity date.