Question 1

Your financial investments consist of U.S.government bonds maturing in twenty years and shares in a start-up internet company.If interest rates on newly-issued government bonds increase, then the price of your bonds will ______ and the price of the shares you own will ____.

Accepted Answer

If the price of newly-issued bonds increases, then the price of current bonds will decrease. Similarly, the price of shares you own will also fall because those shares become less attractive when compared to newly-issued bonds.

Question 2

You expect a share of EconNews.Com to sell for $65 a year from now.If you are willing to pay $65.74 for one share of the stock today, and you require a return of 8%, what dividend payment must you expect to receive from the stock?

Accepted Answer

The answer of You expect a share of EconNews.Com to...

Question 3

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade.Each company's stock currently sells for $100 per share.If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change.If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change.There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average.If you purchase one share of ABC stock and one share of XYZ stock, your expected gain will be _______.

Accepted Answer

The expected gain is the sum of the products of the possible gains and their probabilities. The possible gains are $20, $0, $0, and $20, and the probabilities are 0.5, 0.25, 0.25, and 0.5, respectively. Therefore, the expected gain is (20 * 0.5) + (0 * 0.25) + (0 * 0.25) + (20 * 0.5) = $15.

Question 4

You expect a share of EconNews.Com to sell for $65 a year from now.If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?

Accepted Answer

The required rate of return can be calculated using the formula: [(Future Price + Dividend - Current Price) / Current Price] * 100. Substituting the given values: [(65 + 4 - 62.73) / 62.73] * 100 = 10%.

Question 5

A regular payment received by stockholders for each share they own is called a:

Accepted Answer

A dividend is a regular payment made by a company to its stockholders as a share of their profits. A coupon payment is a regular payment made by a bond issuer to its bondholders, while a bond is a debt security issued by a company or government, and a capital gain is the increase in the value of an investment that is sold at a higher price than its purchase price.

Question 6

Stock prices increase when expected future dividends ____, interest rates _____, and/or the risk premium ______.

Accepted Answer

Higher future dividends increases the expected future value of a stock, which increases the stock price as it makes the stock more attractive compared to alternate assets. Similarly, when market interest rates fall, newly issued bonds become less attractive compared to stocks, so stock prices increase as savers choose to move funds to stocks from bonds. Finally, when a stock's riskiness falls, there is a smaller risk premium, which also causes a stock's price to rise.

Question 7

You own shares in a well-managed and diversified company.If a booming economy decreases investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

Accepted Answer

A booming economy would likely increase demand for the company's products/services and potentially lead to higher profits. This would make the company more attractive to investors, which would increase demand for its shares and drive up the price, all else being equal.

Question 8

Stockholders receive returns on their financial investment in the form of ______ and _____.

Accepted Answer

Stockholders receive returns on their financial investment in the form of capital gains, which is the increase in the value of the stocks they own, and dividends, which are payments made by the company to its shareholders from its profits.

Question 9

The current price of a stock increases when:

Accepted Answer

When interest rates decrease, investors are willing to pay more for a stock because the return on the stock is relatively higher compared to other investments. As a result, the demand for the stock increases, causing its price to increase.

Question 10

You expect a share of EconNews.Com to sell for $65 a year from now.If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5%, how much is your risk premium?

Accepted Answer

The expected return is calculated as (65 + 4 - 61.06) / 61.06 = 12.9%. The risk-free rate is 5%, so the risk premium is 12.9% - 5% = 7.9%, which rounds to 8.0%.

Question 11

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade.Each company's stock currently sells for $100 per share.If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change.If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change.There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average.If you purchase two shares of XYZ stock and no shares of ABC stock, your expected gain will be ______.

Accepted Answer

The answer of Suppose you have $200 with which you...

Question 12

An increase in the perceived riskiness of Company A stock ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

Accepted Answer

When a stock's riskiness increases there is a bigger risk premium. This generally causes a stock's price to fall.

Question 13

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade.Each company's stock currently sells for $100 per share.If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change.If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change.There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average.If you purchase two shares of ABC stock and no shares of XYZ stock, your expected gain will be ______.

Accepted Answer

The expected gain is calculated by considering the probability of each scenario and the corresponding gain. With a 50% chance of colder weather, the gain is $40 (2 shares * $20 increase), and with a 25% chance of warmer weather, the gain is $0. The expected gain is (0.5 * $40) + (0.25 * $0) = $20.

Question 14

An increase in interest rates results in a(n) ______ in the required rate of return to hold stocks and ______ current stock prices.

Accepted Answer

Stock and bond markets are closely connected. When market interest rates rise, newly issued bonds become more attractive compared to stocks, so stock prices fall as savers choose to move funds from stocks to bonds.

Question 15

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock.If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:

Accepted Answer

When the risk premium requirement decreases, the price of the stock will increase as investors are willing to pay more for the same expected return. This is due to the fact that the lower risk premium requirement indicates a decrease in perceived risk, which leads to an increase in demand for the stock and thus an increase in the price.

Question 16

You own shares in a start-up internet company.If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

Accepted Answer

Large swings in the stock market increase financial investors' concerns about market risk, which could lead to a decrease in the price of the shares of a start-up internet company. Financial investors may become more risk-averse, leading them to sell off more volatile investments such as start-up shares in favor of less risky assets.

Question 17

The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called:

Accepted Answer

Diversification involves investing in different types of assets such as stocks, bonds, real estate, commodities, etc. to reduce the risk of losing all of one's money in one particular investment. It spreads out the risk and can result in a more stable overall return.

Question 18

A decrease in the perceived riskiness of Company A stock ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

Accepted Answer

When a stock's riskiness falls, the risk premium decreases. This generally causes a stock's price to rise.

Question 19

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

Accepted Answer

The difference between the rate of return on a risky asset and a safe asset is called the Risk Premium. It is the extra return that investors require for assuming the risk of a volatile and unpredictable investment.

Question 20

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year.What should you pay (rounded to the nearest dollar) for the stock today if you require an 8% return?

Accepted Answer

The answer of You expect a share of EconNews.Com to...

Quiz 8: Saving, Capital Formation, and Financial Markets

Your financial investments consist of U.S.government bonds maturing in twenty years and shares in a start-up internet company.If interest rates on newly-issued government bonds increase, then the price of your bonds will __ and the price of the shares you own will .

You expect a share of EconNews.Com to sell for $65 a year from now.If you are willing to pay $65.74 for one share of the stock today, and you require a return of 8%, what dividend payment must you expect to receive from the stock?

You expect a share of EconNews.Com to sell for $65 a year from now.If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?

A regular payment received by stockholders for each share they own is called a:

Stock prices increase when expected future dividends __, interest rates _, and/or the risk premium ____.

You own shares in a well-managed and diversified company.If a booming economy decreases investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

Stockholders receive returns on their financial investment in the form of __ and _.