Deck 37: Financial Economics

Question 1

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

Answer 1

$1,079.46

Question 2

$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

Answer 2

$540

Question 3

(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

Answer 3

8.3

Question 4

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 5

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 6

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 7

$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 8

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

Question 9

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 10

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 11

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 12

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 13

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 14

(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 15

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 16

(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 17

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 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

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

Question 20

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 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

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 40

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 41

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 42

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 43

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 44

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 45

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 46

Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells it for $600,000.What is Pigou's per-year rate of return?

A)4.8 percent
B)9.8 percent
C)20 percent
D)39.2 percent

Question 47

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 48

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 49

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 50

Mutual funds may contain

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

Question 51

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 52

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 53

Arbitrage occurs when investors try to profit from situations where

A)stock rates of return exceed bond rates of return.
B)bond rates of return exceed stock rates of return.
C)two identical assets have different rates of return.
D)returns on financial assets exceed returns on real assets.

Question 54

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 55

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

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

Question 56

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 57

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 58

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

A)diversification.
B)arbitrage.
C)hedging.
D)securitization.

Question 59

An asset's price and rate of return

A)are independent of each other.
B)can be either inversely or directly related.
C)are inversely related.
D)are directly related.

Question 60

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

A)remain unchanged, as the house price and the rate of return are independent of each other.
B)be 13.6 percent.
C)fall from 9 percent to 8 percent.
D)fall from 10.9 percent to 9.6 percent.

Question 61

Arbitrage causes an equalization of the when assets are identical or nearly identical.

A)levels of risk of assets
B)rates of return of assets
C)time when payments are made from assets
D)prices of assets

Question 62

One statistic that quantifies the risk of an investment is

A)alpha.
B)beta.
C)gamma.
D)the average expected rate of return.

Question 63

Arbitrage equalizes rates of return across similar investments because

A)arbitrage also equalizes the prices of the assets.
B)investors prefer diversity.
C)investors will want to replace lower rate of return assets with those generating higher rates of return.
D)investors will want to replace higher rate of return assets with those generating lower rates of return.

Question 64

According to economists, the two factors most important to personal investment decisions are

A)rates of return and the rate of interest.
B)rates of return and the rate of inflation.
C)returns and diversifiable risk.
D)returns and nondiversifiable risk.

Question 65

Hermione is considering an investment that has a ¾ chance of paying a 10 percent rate of return and a ¼ chance of paying 2 percent.What is the average expected rate of return on the investment?

A)2 percent.
B)6 percent.
C)8 percent.
D)10 percent.

Question 66

Another name for nondiversifiable risk is

A)inflationrisk.
B)systemic risk.
C)cyclical risk.
D)idiosyncratic risk.

Question 67

Nondiversifiable risk refers to potential losses from

A)random fluctuations in specific stocks.
B)bad company policies.
C)portfolio management fraud.
D)events that move all investments in the same direction.

Question 68

The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as

A)hedging the market.
B)passive fund management.
C)arbitrage.
D)portfolio balancing.

Question 69

Diversifiable risk refers to risk

A)faced by a portfolio in general.
B)that can be reduced with appropriate fiscal and monetary policy.
C)posed by business cycle fluctuations.
D)specific to a particular investment.

Question 70

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

A)not affect their rates of return.
B)increase the return on the asset with the higher rate of return as the demand for it increases.
C)increase the gap between the two rates of return.
D)eventually equalize their rates of return.

Question 71

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

A)8 percent.
B)10.4 percent.
C)12.2 percent.
D)24 percent.

Question 72

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

A)stock A to fall and/or the price of stock B to rise.
B)stock A to rise and/or the price of stock B to fall.
C)both stocks to rise or fall together.
D)neither stock to change.

Question 73

Another name for diversifiable risk is

A)systemic risk.
B)inflationrisk.
C)idiosyncratic risk.
D)cyclical risk.

Question 74

Investors diversify portfolios

A)because diversified portfolios pay the highest rates of return.
B)because diversified portfolios are guaranteed not to lose money.
C)to reduce the risk of losing their investment.
D)to guarantee minimum returns on their investment.

Question 75

Brinley holds stock in large high-tech companies in his portfolio.The best way for Brinley to diversify his risk would be to buy

A)more shares of the stock he already owns.
B)shares in other large high-tech companies.
C)bonds or stocks of small and medium-sized companies.
D)bonds from the large high-tech companies already in his portfolio.

Question 76

Arbitrage occurs when

A)bond and stock rates of return equalize.
B)investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return.
C)rates of return across all stocks equalize.
D)investors move from lower to higher rate of return assets, regardless of the comparability of the assets.

Question 77

The beta for the market portfolio's level of nondiversifiable risk is

A)zero.
B)1.
C)100.
D)always fluctuating.

Question 78

Portfolio diversification eliminates all of the from a portfolio.

A)risk
B)diversifiable risk
C)nondiversifiable risk
D)risk from business cycle fluctuations

Question 79

For heavily traded assets like stocks and bonds, arbitrage

A)will equalize rates of return across all stocks and bonds.
B)will drive up rates of return on all assets.
C)is a lengthy process because of the large volume of transactions.
D)will often equalize rates of return among similar assets within minutes.

Question 80

Arbitrage is the process by which investors simultaneously sell

A)assets with higher rates of return and buy otherwise identical assets with lower rates of return.
B)assets with lower rates of return and buy otherwise identical assets with higher rates of return.
C)riskier assets and buy less risky assets.
D)less risky assets and buy riskier assets.