Deck 17: C: Financial Economics

Question 1

What are the two most important factors influencing investor preferences?

A)the desire for high rates of return and the thrill of uncertainty
B)the desire for high rates of return and dislike of risk and uncertainty
C)an equal balance between stocks and bonds, and high rates of return
D)stable rates of return and balance between private and public sector financial assets

Answer 1

B

Question 2

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years.How much will be required to pay off the loan at the end of the five years?

A)$401.47
B)$390
C)$393.54
D)$408.75

Answer 2

A

Question 3

Which of the following statements is true about buying an old factory?

A)It is a financial investment but not an economic investment.
B)It is an economic investment but not a financial investment.
C)It is both an economic and a financial investment.
D)It is neither an economic nor a financial investment.

Answer 3

A

Question 4

The idea that money has "time value" refers to the fact that

A)people prefer to receive a given sum of money in the future rather than in the present.
B)money can be used to purchase the services of labor, as measured in hourly units.
C)a specific amount of money is more valuable to a person the sooner it is received.
D)compound interest converts future dollars into a greater amount of current dollars.

Question 5

Alyssa is saving money for a vacation she wants to take five years from now.If the trip will cost $1,000 and she puts her money into a savings account paying 4 percent interest, compounded annually, how much would Alyssa need to deposit today to reach her goal without making further deposits?

A)$961.54
B)$923.75
C)$867.81
D)$821.93

Question 6

What is the difference between economic and financial investments?

A)Financial investments are sensitive to interest rates; economic investments are not.
B)Economic investments add to the capital stock of an economy; financial investments do not.
C)Economic investments are expressed in real (inflation-adjusted) terms; financial investments are expressed in nominal terms.
D)Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods.

Question 7

Which of the following is an economic investment?

A)shares of corporate stock
B)U.S.savings bonds
C)newly built houses
D)bonds issued by private corporations

Question 8

Present value is best defined as the

A)worth or value today of future expected returns or costs.
B)worth in the future of a current flow of returns or costs.
C)current worth of a financial asset purchased in the past.
D)expected future value of a financial asset purchased today.

Question 9

What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?

A)$1,927.72
B)$500
C)$4,545.45
D)$12,968.71

Question 10

Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time.His purchase would be considered

A)an economic investment but not a financial investment.
B)a financial investment but not an economic investment.
C)both an economic and a financial investment.
D)neither an economic nor a financial investment.

Question 11

According to the concept of the time value of money,

A)money is more valuable to a person the sooner it is received.
B)money is more valuable to a person the later it is received.
C)people are indifferent between receiving a given sum of money now versus receiving it later.
D)there is no opportunity cost of receiving a sum of money later rather than sooner.

Question 12

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?

A)$504
B)$508
C)$540
D)$580

Question 13

$800 invested at an annually compounded interest rate of 6 percent will be worth how much at the end of 10 years?

A)$1,280
B)$1,433
C)$1,417
D)$1,369

Question 14

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

A)$205
B)$210
C)$240
D)$300

Question 15

Compound interest

A)describes how quickly an interest-bearing asset increases in value.
B)measures the rate of return of a portfolio of stocks and bonds.
C)measures the after-tax, inflation-adjusted rate of interest.
D)refers to the multiple rates of interest of various types of bonds in a portfolio.

Question 16

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?

A)$1,250.
B)$250.
C)$267.25.
D)$255.26.

Question 17

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years.How much will be required to pay off the loan at the end of 10 years?

A)$900
B)$962.85
C)$1,079.46
D)$1,123.21

Question 18

Which of the following statements best reflects the concept of present value?

A)"The savings bond I bought five years ago is now worth $1,000."
B)"My $100 savings bond will be worth $200 in 10 years."
C)"You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now."
D)"The $5,000 in my savings account is worth less today than five years ago because of inflation."

Question 19

Which of the following is both an economic and a financial investment?

A)government building a new road
B)Boeing Corporation building a new factory
C)a private citizen buying corporate stock
D)the Federal Reserve buying bonds from commercial banks

Question 20

Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.

A)$2,480
B)$2,524.95
C)$1,584.19
D)$1,520

Question 21

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

A)believe the rate of return they could find in other financial assets is less than that implied in the extended payout.
B)sacrifice free money and are making an economically irrational decision.
C)prefer immediate to delayed returns.
D)are only making a rational economic decision if there is rapid inflation.

Question 22

If i is the interest rate and X is the number of dollars to be received after t years, the formula to calculate the present value of a future payment is

A)(1 + i)tX.
B)
B)X/(1 + i)t. ^C. i^t/(1 + X).
D)(X/i)t.

Question 23

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

A)5.2
B)6.8
C)8.3
D)10

Question 24

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

A)$300
B)$338.42
C)$700
D)$738.72

Question 25

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

A)4.8 percent
B)5.2 percent
C)5.7 percent
D)6.2 percent

Question 26

(Advanced analysis) Susie has $500 invested in a financial asset earning an annually compounded interest rate of 8 percent.If Susie plans to cash in the asset when it is worth $700, about how long will she have to wait?

A)4.4 years
B)5 years
C)6.1 years
D)8 years

Question 27

(Advanced analysis) Indy has $2,000 invested in a financial asset earning an annually compounded interest rate of 6 percent.Approximately how many years will it take before Indy's investment is worth $5,000?

A)25
B)10.5
C)12.8
D)15.7

Question 28

The present value of a future amount of money will be greater the

A)greater the interest rate.
B)less the amount of time before the future payment is received.
C)more the amount of time before the future payment is received.
D)greater the expected rate of inflation.

Question 29

The price of an asset should

A)exactly equal the total present value of all of the asset's future payments.
B)exactly equal the total future value of all of the asset's future payments.
C)approximately equal X(1 + i)t, where X is the value of the asset, i is the interest rate, and t is the number of years.
D)exactly equal the total present and future value of all of the asset's future payments.

Question 30

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

A)4.6 percent
B)6.5 percent
C)8.4 percent
D)9.3 percent

Question 31

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

A)present value
B)future value
C)compound interest
D)real rate of interest

Question 32

The formula for present value allows investors to

A)convert a given number of dollars in the future into its present equivalent.
B)determine the future impact of inflation on a present amount of money.
C)know which financial assets will provide the greatest future returns.
D)do all of these.

Question 33

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

A)8.75 percent
B)9.1 percent
C)10 percent
D)10.4 percent

Question 34

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

A)(1 + i)tX
B)X/(1 + i)t
C)(1 + X)i^t
D)(X + i)t

Question 35

Which of the following is not common to all investments?

A)Investors are required to pay some price to acquire them.
B)Owners are given the opportunity to receive future payments.
C)Future payments are typically risky.
D)The investment pays a positive rate of interest.

Question 36

Which of the following is common to all investments?

A)The investment pays interest.
B)Some price must be paid to acquire them.
C)Owners are guaranteed future payments.
D)Government insurance backs them.

Question 37

Suppose that Clint wins a lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

A)Yes, but only if rapid inflation is expected over the next 30 years.
B)Yes, but only if deflation is expected over the next 30 years.
C)No, the rate of return will always be higher with the 30 annual payments.
D)Yes, if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments.

Question 38

Professional athletes attempting only to maximize income will defer larger salaries if

A)deferred payouts are adjusted upward to compensate for forgone interest.
B)it increases the team's chance to win.
C)there is no chance of inflation.
D)it allows them to stay in a city and not to have to move their family.

Question 39

^{The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a two-year contract but, because of salary cap limitations, can only pay $8 million for the first year (Alex's market value is $10 million per year). The Hazards offer to pay $8 million in year 1 and $13 million in year 2.} Should Alex sign the contract?

A)Yes, Alex is better off financially regardless of the interest rate.
B)Yes, if the interest rate is less than 50 percent.
C)Yes, but only if the team expects to be successful.
D)Yes, but only if the interest rate is less than 10 percent.

Question 40

The present value of a future amount of money will be greater the

A)greater the interest rate.
B)greater the amount of time before the future payment is received.
C)lower the interest rate.
D)greater the rate of the expected rate of inflation.

Question 41

Les buys a bond for $5,000.Every year that he holds the bond, he will receive interest payments of $250.The interest rate on the bond

A)is 2 percent.
B)is 5 percent.
C)is 20 percent.
D)cannot be determined.

Question 42

The maximum amount of money that company shareholders can lose on their investment in the corporation is

A)whatever percentage of their wealth equals their percentage of ownership.
B)whatever they paid for the shares in the company.
C)whatever the corporation loses each year times the percentage of ownership in the company.
D)zero.

Question 43

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.If Indy sells all his shares at a price of $30 per share, he will receive a

A)total capital gain of $10.
B)dividend of $10 per share.
C)total capital gain of $1,000.
D)capital gain of $30 per share.

Question 44

Augi buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately

A)4 percent.
B)8 percent.
C)12.5 percent.
D)25 percent.

Question 45

Which of the following is a difference between stocks and bonds?

A)Stocks are issued for a fixed period; bonds are not.
B)Stocks pay interest; bonds pay dividends.
C)Bond payouts are more predictable than payouts from stocks.
D)Bonds represent ownership; stocks represent debt.

Question 46

A stockholder owning 5 percent of a company's stock

A)is guaranteed to receive 5 percent of the company's yearly profits.
B)is personally responsible for 5 percent of the debts if the company goes bankrupt.
C)has 5 percent of her personal assets vulnerable if the company goes bankrupt.
D)gets 5 percent of the votes at the shareholders' meetings.

Question 47

Debt contracts (also called instruments) issued by government and corporations are known as

A)bonds.
B)stocks.
C)real assets.
D)federally insured deposits.

Question 48

Which of the following is a difference between stocks and bonds?

A)Bonds represent ownership; stocks represent debt.
B)Bonds make interest payments; stocks pay dividends.
C)Stock payouts are predictable; bond payouts are not.
D)All of these are differences between stocks and bonds.

Question 49

Ownership of a single corporation is represented by what investment?

A)stock
B)bonds
C)mutual funds
D)commercial paper

Question 50

Which of the following is a difference between stocks and bonds?

A)Bonds may be issued by corporations or government; stock is only issued by corporations.
B)Stock may be issued by corporations or government; bonds are only issued by corporations.
C)Bonds are only issued by government; stock is only issued by corporations.
D)There is no difference in terms of who issues stocks and bonds.

Question 51

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

A)capital gains; dividends
B)dividends; capital gains
C)interest; dividends
D)interest; capital gains

Question 52

When shares of stock are sold for more than the price at which they were purchased, the difference received by the seller is referred to as

A)a dividend.
B)a capital gain.
C)interest.
D)economic profit.

Question 53

If a corporation goes bankrupt,

A)neither stockholders nor bondholders receive any money.
B)stockholders get paid from the sale of company assets before bondholders do.
C)bondholders get paid from the sale of company assets before stockholders do.
D)stockholders must honor the debts to bondholders out of personal assets if necessary.

Question 54

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond

A)is $110.
B)is $125.
C)is $140.
D)depends on rates of return she could earn on other, similar investments.

Question 55

Bonds represent

A)a claim on company dividends.
B)ownership of a company.
C)all financial assets guaranteed to pay interest.
D)loans to governments and corporations.

Question 56

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.If Indy holds his shares for five years, he

A)will have received $500 in dividends.
B)will earn a capital gain of $500.
C)will receive $500 in interest.
D)should sell the stock to maximize the return on his investment.

Question 57

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.Indy should necessarily sell his stock if

A)the price falls below $20 per share.
B)he expects the sum of future capital gains and dividends to be negative.
C)the company stops paying dividends.
D)any of these circumstances occur.

Question 58

The current share price of a corporation's stock is determined by the

A)original purchase price multiplied by 1 plus the interest rate.
B)present value of capital gains and dividends received by stock owners.
C)expected interest and dividend payments.
D)expected capital gains and dividends prospective buyers will earn.

Question 59

Limited liability rules

A)mean that bankrupt companies owe nothing to corporate bondholders.
B)discourage investment in corporate stock.
C)help prevent corporate fraud.
D)encourage stock investing by limiting shareholder risk of loss.

Question 60

Payments to shareholders from corporate profits are known as

A)dividends.
B)capital gains.
C)interest.
D)appreciation.

Question 61

Index funds are a portfolio of

A)bonds with rates of return fixed at 2 percentage points above the rate of inflation.
B)mutual funds that track different indexes.
C)stocks or bonds that exactly match a particular index.
D)stocks guaranteed rates of return in excess of growth in the GDP price index.

Question 62

George buys an antique car for $20,000 and sells it five years later for just over $24,000.George's per-year rate of return is

A)20 percent.
B)12 percent.
C)10 percent.
D)4 percent.

Question 63

The U.S.federal government is unlikely to default on its bond payments because

A)if necessary, it can print the money needed to make payments on time.
B)its bond payments are insured.
C)the U.S.federal budget usually runs a surplus, providing ample funds for repaying debt.
D)of all of these.

Question 64

The estimated value of all financial assets held by U.S.households and nonprofit organizations in 2015 was about

A)$8.1 trillion.
B)$17.9 trillion.
C)$54 trillion.
D)$70 trillion.

Question 65

Which institution is least likely to default on a bond?

A)local government
B)small corporation
C)U.S.federal government
D)large corporation

Question 66

Index funds

A)are passively managed.
B)are actively managed.
C)may be either passively or actively managed.
D)are neither passively nor actively managed.

Question 67

Mutual funds may contain

A)stocks only.
B)bonds only.
C)either stocks or bonds.
D)neither stocks nor bonds.

Question 68

Bond payments are generally more predictable than stocks because

A)interest on bonds is not taxable.
B)stock prices and dividends exhibit little volatility.
C)bonds generate higher average rates of return.
D)bond owners know the size and timing of payments they will receive.

Question 69

Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return

A)is 0.5 percent.
B)is 5 percent.
C)is 6 percent.
D)cannot be determined until she sells the house.

Question 70

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000.Thea's per-year rate of return is

A)4.8 percent.
B)14.8 percent.
C)20 percent.
D)29.6 percent.

Question 71

How do actively managed funds differ from passively managed funds?

A)Managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns.
B)Actively managed funds focus on stocks; passively managed funds focus on bonds.
C)Actively managed funds necessarily contain a greater variety of stocks or bonds than does a passively managed fund.
D)Actively managed funds consistently outperform passively managed funds.

Question 72

The Standard & Poor's 500 Index measures prices of the 500

A)most purchased consumer goods in the United States.
B)stocks of the largest companies in the United States.
C)largest bonds trading in the United States.
D)largest index funds trading in the United States.

Question 73

Investment returns

A)are always positive.
B)are only received when an asset is sold.
C)are only received when there is a stream of multiple payments generated by the asset.
D)can be received either through the sale of an asset or as a stream of payments.

Question 74

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately

A)1.3 percent.
B)2 percent.
C)5 percent.
D)20 percent.

Question 75

"Default" occurs when

A)bond issuers fail to make promised payments.
B)corporations go bankrupt and stock becomes worthless.
C)bond purchasers fail to pay full price for a bond.
D)stocks are not federally insured.

Question 76

Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at the end of the year for $390,000.Lucian's rate of return

A)is 2 percent.
B)is 4.5 percent.
C)is negative 2.5 percent.
D)cannot be determined.

Question 77

Denny buys a rare coin for $200 and sells the coin one year later for $220.Denny's rate of return is

A)10 percent.
B)20 percent.
C)91 percent.
D)110 percent.

Question 78

At the end of 2015, U.S.households and nonprofit organizations held approximately in mutual funds.

A)$5.3 billion
B)$6 trillion
C)$8.1 trillion
D)$70 trillion

Question 79

Kelly buys a share of stock for $20 that she sells a year later for $15.Kelly's rate of return is

A)positive 33 percent.
B)negative 33.3 percent.
C)negative 25 percent.
D)negative 75 percent.

Question 80

The largest mutual fund, as of April 2016, held approximately billion in assets under management.

A)$70
B)$90
C)$147
D)$170