Chapter 27

Chapter 27 The Basic Tools of Finance
TRUE/FALSE 1. If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03. A !" # $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value /!," Applicative &. If a savin0s account pays 5 percent annual interest, then the rule of 70 tells us that the account value 1ill double in appro2i-ately 14 years. A !" # $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." ,o-poundin0 /!," Applicative 3. #he present value of $100 to be paid in t1o years is less than the present value of $100 to be paid in three years. A !" % $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value /!," Analytic 4. #he future value of $1 saved today is $1341 5 r6. A !" % $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value /!," Analytical 5. #he present value of any future su- of -oney is the a-ount that 1ould be needed today, at current interest rates, to produce that future su-. A !" # $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value /!," Interpretive 7. #he sooner a pay-ent is received and the hi0her the interest rate, the 0reater the present value of a future pay-ent. A !" % $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value /!," Analytical 7. A co-pany that can build a pro8ect that 1ill cost $50,000, but returns $5&,000 in one year 1ould -a9e a 0ood decision by turnin0 this pro8ect do1n if the interest rate 1ere 3 percent. A !" % $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : .resent value /!," Analytical 8. As the interest rate increases, the present value of future su-s decreases, so fir-s 1ill find fe1er invest-ent pro8ects profitable. A !" # $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : .resent value /!," Analytical ;. Accordin0 to the rule of 70, if you earn an interest rate of 3.5 percent, your savin0s 1ill double about every &0 years. A !" # $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'ule of 70 /!," $efinitional
1;
&0
10.
,hapter &73#he <asic #ools of %inance
If you are faced 1ith the choice of receivin0 $500 today or $800 7 years frotoday, you 1ill be indifferent bet1een the t1o possibilities if the interest rate is 8.148 percent. A !" # $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value /!," Applicative 11. 'is9 aversion si-ply -eans that people disli9e bad thin0s to happen. A !" % $I%" 1 '(%" &7)& A#" Analytic *+," #he study of econo-ics, and definitions of econo-ics #+." 'is9 /!," Interpretive 1&. 'is9)averse individuals li9e 0ood thin0s -ore than they disli9e co-parable bad thin0s. A !" % $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'is9 /!," Interpretive 13. .eople 1ho are ris9 averse disli9e bad outco-es -ore than they li9e co-parable 0ood outco-es. A !" # $I%" & '(%" &7)& A#" Analytic *+," =tility and consu-er choice #+." 'is9 /!," Interpretive 14. #he -ar9et for insurance is an e2a-ple of diversification. A !" # $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Interpretive 15. A person>s sub8ective -easure of 1ell)bein0 or satisfaction is called aversion. A !" % $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." =tility /!," $efinitional 17. ?istorically, stoc9s have offered hi0her rates of return than bonds. A !" # $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'eturns /!," $efinitional 17. ?istorically the return on stoc9s has been hi0her than the return on bonds. In part this reflects the hi0her ris9 fro- holdin0 stoc9. A !" # $I%" & '(%" &7)& A#" Analytic *+," #he study of econo-ics, and definitions of econo-ics #+." 'is9 : 'eturns /!," $efinitional 18. 'is9)averse persons 1ill ta9e no ris9s. A !" % $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'is9 /!," Interpretive 1;. #he -ar9et for insurance is one e2a-ple of reducin0 ris9 by usin0 diversification. A !" # $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification : Insurance /!," $efinitional &0. A person 1ith di-inishin0 -ar0inal utility of 1ealth is ris9 averse. A !" # $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'is9 /!," $efinitional &1. Adverse selection is illustrated by people 1ho ta9e 0reater ris9s after they purchase insurance. A !" % $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection /!," Interpretive

&&. Increasin0 the nu-ber of corporations 1hose stoc9s are in your portfolio reduces -ar9et ris9. A !" % $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification : 'is9 /!," Applicative &3. $iversification can reduce fir-)specific ris9. A !" # $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Applicative &4. Accordin0 to funda-ental analysis, 1hen choosin0 stoc9s for your portfolio, you should prefer undervalued stoc9s. A !" # $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," Applicative &5.
&1
#he value of a stoc9 depends on the ability of the co-pany to 0enerate dividends and the e2pected price of the stoc9 1hen the stoc9holder sells her shares. A !" # $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," $efinitional &7. Accordin0 to the efficient -ar9ets hypothesis, at any -o-ent in ti-e, the -ar9et price is the best esti-ate of the co-pany@s value based on publicly available infor-ation. A !" # $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional &7. Accordin0 to the efficient -ar9ets hypothesis, stoc9s follo1 a rando- 1al9 so that stoc9s that increase in price one year are -ore li9ely to increase than decrease in the ne2t year. A !" % $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'ando- 1al9 /!," $efinitional &8. Accordin0 to the efficient -ar9ets hypothesis, the nu-ber of people 1ho thin9 a stoc9 is overvalued e2actly balances the nu-ber of people 1ho thin9 a stoc9 is undervalued. A !" # $I%" & '(%" &7)3 A#" Analytic *+," #he study of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional &;. !tudies find that -utual fund -ana0ers 1ho do 1ell in one year, are li9ely to do 1ell the ne2t year. A !" % $I%" & '(%" &7)3 A#" Analytic *+," #he study of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional 30. /ana0ed -utual funds usually outperfor- -utual funds that are supposed to follo1 so-e stoc9 inde2. A !" % $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Inde2 funds : /utual funds /!," $efinitional 31. !peculative bubbles -ay arise in part because the value of the stoc9 to a stoc9holder depends on the final sale price. A !" # $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation /!," Interpretive 3&. Available evidence indicates that stoc9 prices, even if not e2actly a rando- 1al9, are very close to a rando1al9. A !" # $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'ando- 1al9 /!," Interpretive
&&
33.
If you 1ish to rely on funda-ental analysis to choose a portfolio of stoc9s, then you have no choice but to do all the necessary research yourself. A !" % $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," Interpretive 34. If you believe the stoc9 -ar9et is infor-ationally efficient, then it is a 1aste of ti-e to en0a0e in funda-ental analysis. A !" # $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis : %unda-ental analysis /!," Interpretive SHORT ANSWER 1. $e-onstrate that 1hether you 1ould prefer to have $&&5 today or 1ait five years for $300 depends on the interest rate. !ho1 your 1or9.
A !" %or e2a-ple at 3 percent the present value of $300 in five years is $300341.0365 A $&58.78 but at 7 percent the present value of $300 in five years is $300341.0765 A $&13.;0. $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical &. #+." .resent value
As the interest rate increases, 1hat happens to the present value of a future pay-entB (2plain 1hy chan0es in the interest rate 1ill lead to chan0es in the Cuantity of loanable funds de-anded and invest-ent spendin0.
A !" An increase in the interest rate reduces the present value of future pay-ents. Invest-ent spendin0 is the purchasin0 of capital 0oods that are e2pected to raise future revenues. Dhen interest rates rise, the present value of these future revenues decline so that fe1er capital e2penditures are li9ely to 0enerate enou0h revenue to 8ustify their price. ,onseCuently fir-s 1ill 1ant to buy fe1er capital 0oods and 1ill de-and a lo1er Cuantity of loanable funds. $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical 3. #+." .resent value
Drite the rule of 70. !uppose that your 0reat)0reat)0rand-other put $50 in a savin0s account 100 years a0o and the account is no1 1orth $1,700. =se the rule of 70 to deter-ine about 1hat interest rate she earned.
A !" $1,7003$50 A 3&. #he rule of 70 says that if X is the 0ro1th rate of a variable, then the variable doubles every 703X years. #his i-plies the value of the stoc9 doubled five ti-es. !ince it doubled 5 ti-es in 100 years, it doubled every &0 years. Accordin0 to the rule of 70, the value of an asset doubles every 703X years. !o, 1e need 703X A &0, 1hich -eans that X is 3.5 percent. $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical #+." 'ule of 70
4. Eive an e2a-ple of adverse selection and an e2a-ple of -oral haFard usin0 ho-eo1ners insurance. A !" An e2a-ple of adverse selection is that so-eone 1hose ho-e is in a location prone to theft is -ore li9ely to apply for ho-eo1ners insurance. An e2a-ple of -oral haFard is that once so-eone has insurance, he -i0ht 9eep fe1er fire e2tin0uishers in the house. $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection : /oral haFard /!," Interpretive

5.
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Dhat@s the difference bet1een fir-)specific ris9 and -ar9et ris9B Dill diversification eli-inate one or bothB (2plain.
A !" /ar9et ris9 refers to econo-y1ide ris9 created by variations in output. %ir-s in 0eneral have lo1er sales and profits 1hen output falls. <ecause all fir-s are li9ely to suffer throu0h the do1nturn, -ar9et ris9 cannot be eli-inated by diversification. %ir- specific ris9 is specific to fir-s or industries and not the entire econo-y. !ince so-e chan0es 1ill be 0ood for one industry and bad for another, diversification can reduce fir-)specific ris9 but not -ar9et ris9. $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional #+." 'is9
7. *ist three different 1ays that a ris9)averse person can reduce financial ris9. A !" A ris9)averse person can reduce ris9 by buyin0 insurance, by diversifyin0 her stoc9 portfolio, and by holdin0 a lar0er percenta0e of her assets as lo1 ris9 and lo1 return assets such as 0overn-ent securities. $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive #+." 'is9
7. $iscuss the statistical evidence concernin0 the efficient -ar9ets hypothesis. A !" #he evidence indicates that stoc9 prices -ay not follo1 a rando- 1al9 e2actly, but they are pretty close. #he correlation bet1een ho1 1ell a stoc9 does one year and ho1 1ell it does the ne2t is close to Fero. Inde2ed funds tend to perfor- better than -ost -ana0ed funds. ?o1ever, there is so-e evidence that people -ay beco-e overconfident in their abilities and this -ay lead to the overvaluation of stoc9s. $I%" 3 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional 8. #+." (fficient -ar9ets hypothesis
In the 1;;0s, several stoc9s had very, very hi0h price to earnin0s ratios. #hese stoc9s appeared overvalued to -any observers. Dhat -i0ht the people 1ho bou0ht the- have been thin9in0B
A !" #here are several possibilities. #he first is that they had very hi0h e2pectations for corporations that 1eren@t doin0 1ell at the ti-e to do very 1ell in the future. #he second is that in evaluatin0 the value of stoc9s they too9 into account 1hat others -i0ht be 1illin0 to pay for the- in the future. (ven if they thou0ht that the corporation -i0ht never be profitable, they -i0ht have believed that other people 1ould be 1illin0 to pay a lot for it in the future. Another possibility is that people beca-e overconfident in their ability to pic9 stoc9s in a risin0 stoc9 -ar9et. #his overconfidence -ay have led buyers to bid up prices. $I%" 3 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical ;. #+." Asset valuation
Eive t1o conditions that are i-portant to the efficient -ar9et theory. *ist one i-plication of the efficient -ar9et theory.
A !" (fficient -ar9et theory says that it should be very difficult to beat the -ar9et by findin0 undervalued stoc9s. #he first condition is that lots of people are follo1in0 the stoc9 e2chan0e closely, so that any ne1 infor-ation 1ill be Cuic9ly reflected in a chan0e in the stoc9 price. #he second condition is that supply and de-and deter-ine the price. #hus, the -ar9et 1ill balance the nu-ber of people 1ho thin9 the stoc9 is overvalued 1ith those 1ho thin9 it is undervalued. ,onseCuently, it should be difficult to consistently beat the -ar9et. $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional #+." (fficient -ar9ets hypothesis
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10. $ra1 0raphs sho1in0 the follo1in0 three relationships. 1. #he relation bet1een utility and 1ealth for a ris9 averse consu-er. &. #he relation bet1een standard deviation and the nu-ber of stoc9s in a portfolio. 3. #he relation bet1een return and ris9. A !"
$I%" & A#" Analytic #+." 'is9
'(%" &7)1 : &7)& : &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Sec
1.
! The Basic Tools of Finance

/ost financial decisions involve t1o related ele-ents" a. advice and consent. b. invest-ent and ta2es. c. ti-e and ris9. d. savin0 and consu-ption.
"ULT#$LE CHO#CE
A !" , $I%" 1 '(%" &7)0 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." #i-e horiFon : 'is9 /!," Interpretive &. #he field of finance pri-arily studies a. ho1 society -ana0es its scarce resources. b. the i-plications of ti-e and ris9 for allocatin0 resources over ti-e. c. fir-s> decisions concernin0 ho1 -uch to produce and 1hat price to char0e. d. ho1 society can reduce -ar9et ris9.
A !" < $I%" 1 '(%" &7)0 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'is9 : #i-e horiFon /!," $efinitional 3. #he financial systea. involves ban9 accounts, -ort0a0es, stoc9 prices, and -any other ite-s. b. involves decisions and actions underta9en by people at a point in ti-e that affect their lives in the future. c. coordinates the econo-y>s savin0 and invest-ent. d. All of the above are correct.
A !" $ $I%" 1 '(%" &7)0 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %inancial syste/!," Interpretive

4. Dhich of the follo1in0 state-ents best describes the econo-ist>s vie1 of finance and the financial syste-B a. #he financial syste- is very i-portant to the functionin0 of the econo-y, and the tools of finance are often helpful to us as individuals 1hen 1e find ourselves -a9in0 certain decisions. b. #he financial syste-, 1hile interestin0, is not very i-portant to the functionin0 of the econo-yG ho1ever, the tools of finance are often helpful to us as individuals 1hen 1e find ourselves -a9in0 certain decisions. c. #he financial syste- is very i-portant to the functionin0 of the econo-yG ho1ever, the tools of finance are not particularly helpful to us as individuals since 1e seldo- -a9e decisions for 1hich those tools are useful . d. #he field of finance is inti-ately concerned 1ith the financial syste- and the tools of finance, and financial econo-ists see 0reat i-portance in the-G ho1ever, the H-ainstrea-I econo-ist sees little value in studyin0 financial -ar9ets or the tools of finance.
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A !" A $I%" 1 '(%" &7)0 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %inancial syste/!," Interpretive
Sec % ! The Basic Tools of Finance ! $resent &al'e( "eas'rin) the Ti*e &al'e of "one+
"ULT#$LE CHO#CE 1. !uppose you put $350 into a ban9 account today. Interest is paid annually and the annual interest rate is 7 percent. #he future value of the $350 after 4 years is a. $414.0;. b. $434.00. c. $441.87. d. $481.&4. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." %uture value &.
!uppose you put $500 into a ban9 account today. Interest is paid annually and the annual interest rate is 5.5 percent. #he future value of the $500 is a. $737.50 after 5 years and $8&&.0; after 10 years. b. $737.50 after 5 years and $775.00 after 10 years. c. $753.48 after 5 years and $854.07 after 10 years. d. $788.37 after 5 years and $;15.57 after 10 years. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." %uture value 3.
If the interest rate is 7.5 percent, then 1hat is the present value of $4,000 to be received in 7 yearsB a. $&,4&0.78 b. $&,5;1.85 c. $&,;;7.33 d. $3,040.73 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." .resent value
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4.

!uppose you 1ill receive $500 at so-e point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is a. $411.&7 if the $500 is to be received in 5 years and $338.;5 if the $500 is to be received in 10 years. b. $348.&8 if the $500 is to be received in 5 years and $&4&.70 if the $500 is to be received in 10 years. c. $&;1.11 if the $500 is to be received in 5 years and $&7&.8; if the $500 is to be received in 10 years. d. $&;1.11 if the $500 is to be received in 5 years and $&37.4; if the $500 is to be received in 10 years. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." .resent value 5.
I-a0ine that so-eone offers you $100 today or $&00 in 10 years. Jou 1ould prefer to ta9e the $100 today if the interest rate is a. 4 percent. b. 7 percent. c. 8 percent. d. All of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." .resent value 7.
I-a0ine that so-eone offers you $100 today or $&00 in 10 years. Jou 1ould prefer to ta9e the $100 today if the interest rate is a. 4 percent. b. 5 percent. c. 7 percent. d. one of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." .resent value 7.
I-a0ine that so-eone offers you $1,000 today or $1,500 in 5 years. Jou 1ould prefer to ta9e the $1,500 in 5 years if the interest rate is a. 7 percent. b. 10 percent. c. 1& percent. d. All of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." .resent value 8.
I-a0ine that so-eone offers you $X today or $1,500 in 5 years. If the interest rate is 7 percent, then you 1ould prefer to ta9e the $X today if and only if a. X K 1,055.57. b. X K 1,1&0.8;. c. X K 1,&13.33. d. X K 1,338.&7. $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." .resent value

;. I-a0ine that so-eone offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you 1ould prefer to ta9e the $1,000 today if and only if a. X L 1,045.00. b. X L 1,188.8;. c. X L 1,&77.77. d. X L 1,370.87. $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
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A !" $ A#" Analytic #+." .resent value 10.
In 1hich of the follo1in0 instances is the present value of the future pay-ent the lar0estB a. Jou 1ill receive $1,000 in 5 years and the annual interest rate is 5 percent. b. Jou 1ill receive $1,000 in 10 years and the annual interest rate is 3 percent. c. Jou 1ill receive $&,000 in 10 years and the annual interest rate is 10 percent. d. Jou 1ill receive $&,400 in 15 years and the annual interest rate is 8 percent. $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Compounding refers directly to a. findin0 the present value of a future su- of -oney. b. findin0 the future value of a present su- of -oney. c. chan0es in the interest rate over ti-e on a ban9 account or a si-ilar savin0s vehicle. d. interest bein0 earned on previously)earned interest.
A !" $ $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." ,o-poundin0 /!," $efinitional 1&. Discounting refers directly to a. findin0 the present value of a future su- of -oney. b. findin0 the future value of a present su- of -oney. c. calculations that i0nore the pheno-enon of co-poundin0 for the sa9e of ease and si-plicity. d. decreases in interest rates over ti-e, 1hile compounding refers to increases in interest rates over ti-e. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
!uppose you are decidin0 1hether or not to buy a particular bond. If you buy the bond and hold it for 5 years, then at that ti-e you 1ill receive a pay-ent of $10,000. If the interest rate is 7 percent, you 1ill buy the bond if its price today is no 0reater than a. $8,&&5.07. b. $7,75&.58. c. $7,47&.58. d. $7,;;8.;8.
A !" , $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : <onds /!," Applicative 14. !uppose you are decidin0 1hether or not to buy a particular bond for $&,;;0.08. If you buy the bond and hold it for 5 years, then at that ti-e you 1ill receive a pay-ent of $5,000. Jou 1ill buy the bond today if the interest rate is a. no less than ;.48 percent. b. no 0reater than ;.48 percent. c. no less than 10.83 percent. d. no 0reater than 10.83 percent.
A !" $ $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : <onds /!," Applicative
&8
15.

A -anufacturin0 co-pany is thin9in0 about buildin0 a ne1 factory. #he factory, if built, 1ill yield the co-pany $300 -illion in 7 years, and it 1ould cost $&&0 -illion today to build. #he co-pany 1ill decide to build the factory if the interest rate is a. no less than 4.53 percent. b. no 0reater than 4.53 percent. c. no less than 5.81 percent. d. no 0reater than 5.81 percent. $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Dhich of the follo1in0 is the correct 1ay to co-pute the future value of $X that earns r percent interest for N yearsB a. $X41 5 rN6N b. $X41 5 r6N c. $X41 5 rN6 d. $X41 5 r3N6N $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" < A#" Analytic #+." %uture value 17.
Dhich of the follo1in0 is the correct 1ay to co-pute the future value of $1 put into an account that earns 5 percent interest for &0 yearsB a. $141 5 .056&0 b. $141 5 .05 &06 &0 c. $141 5 .05 &06 d. $141 5 &03.056&0 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." %uture value 18.
Dhich of the follo1in0 is the correct 1ay to co-pute the future value of $100 put into an account that earns 4 percent interest for 10 yearsB a. $10041 5 .04106 b. $10041 5 .04 106 c. $100 2 10 2 41 5 .046 d. $10041 5 .04610 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." %uture value 1;.
#he future value of a deposit in a savin0s account 1ill be lar0er a. the lon0er a person 1aits to 1ithdra1 the funds. b. the hi0her the interest rate is. c. the lar0er the initial deposit is. d. All of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" $ A#" Analytic #+." %uture value &0.
#he future value of a deposit in a savin0s account 1ill be s-aller a. the lon0er a person 1aits to 1ithdra1 the funds. b. the lo1er the interest rate is. c. the lar0er the initial deposit is. d. All of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." %uture value

&1. Dhat is the future value of $500 one year frotoday if the interest rate is 4 percentB a. $515 b. $5&0 c. $530 d. one of the above is correct. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
&;
A !" < A#" Analytic #+." %uture value &&.
Dhat is the future value of $750 one year frotoday if the interest rate is 3 percentB a. 77&.73 b. 77&.50 c. 773.33 d. one of the above are correct to the nearest cent. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." %uture value &3.
Dhat is the future value of $800 one year frotoday if the interest rate is 7 percentB a. $747.77 b. $757.00 c. $857.00 d. one of the above are correct to the nearest cent. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." %uture value &4.
Dhat is the future value of $333 at an interest rate of 3 percent one year fro- todayB a. $337.3; b. $34&.;; c. $343.0; d. one of the above are correct to the nearest cent. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Dhat is the future value of $450 at an interest rate of 15 percent t1o years fro- todayB a. $5&5.87 b. $577.00 c. $585.00 d. $5;5.13 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." %uture value &7.
At an annual interest rate of 10 percent, about ho1 -any years 1ill it ta9e $100 to double in valueB a. 5 b. 7 c. ; d. 11 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
At an annual interest rate of 10 percent, about ho1 -any years 1ill it ta9e $100 to triple in valueB a. 8 b. 10 c. 1& d. 14
30

$I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." %uture value &8.
At an annual interest rate of 14 percent, about ho1 -any years 1ill it ta9e $100 to double in valueB a. 3 b. 4 c. 5 d. 7 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." %uture value &;.
At an annual interest rate of &0 percent, about ho1 -any years 1ill it ta9e $100 to triple in valueB a. 5 b. 7 c. 8 d. ; $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
If you put $&50 into an account 1ith a 4 percent interest rate, ho1 -any years 1ould you have to 1ait to have $370.07B a. 10 b. 14 c. 17 d. &0 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
If you presently have $50,000 saved and earn 15 percent interest per year, about ho1 -any years 1ill it ta9e for your invest-ent to tripleB a. 7 b. 8 c. 10 d. 1& $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." %uture value 3&.
Jou put $75 in the ban9 one year a0o and for0ot about it. #he ban9 sends you a notice that you no1 have $81 in your account. Dhat interest rate did you earnB a. 5 percent b. 7 percent c. 7 percent d. 8 percent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." %uture value 33.
Jou put $150 in the ban9 t1o years a0o and for0ot about it. #he ban9 sends you a notice that you no1 have $177.;5 in your account. Dhat interest rate did you earnB a. 5.50 percent b. 5.75 percent c. 7.&5 percent d. 7.05 percent

A !" A A#" Analytic #+." %uture value 34. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
31
<o 9no1s that he has about $;5 in his ban9 account. ?e 9no1s he earned an interest rate of 4 percent, but he doesn@t re-e-ber ho1 -uch he opened the account 1ith a year a0o. ?o1 -uch did he put inB a. $;1.00 b. $;1.&0 c. $;1.&7 d. $;1.35 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Jou put $&75 in the ban9 one year a0o and for0ot about it. #he ban9 sends you a notice that you no1 have $&;1.50 in your account. Dhat interest rate did you earnB a. 5 percent b. 7 percent c. 7 percent d. 8 percent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Jour parents put $500 into an account payin0 7 percent interest for you 1hen you 1ere ten. #en years later they tell you that you can ta9e the -oney out of the account. Dhat is the balance to the nearest centB a. $1,&00.00 b. $1,111.77 c. $;83.58 d. $850.00 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
If you put $1&5 into an account that paid 3.&5 percent interest, then ho1 -uch -oney 1ould you have in the account after &0 yearsB a. $&85.83 b. $&37.;8 c. $&0&.04 d. $145.75 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
If you put $300 into an account payin0 & percent interest, 1hat 1ill be the value of this account in 4 yearsB a. $3&0.7; b. $3&4.00 c. $3&4.73 d. $3&7.81 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." %uture value 3;.
#1o years a0o $avid put $3,000 into an account payin0 3 percent interest. ?o1 -uch does he have in the account todayB a. $3,180.00 b. $3,18&.70 c. $3,183.7& d. one of the above are correct to the nearest cent.
3&

$I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
#hree years a0o ?eidi put $1,&00 into an account payin0 & percent interest. ?o1 -uch is the account 1orth todayB a. $1,&&5.38 b. $1,&48.48 c. $1,&74.7& d. $1,&73.45 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
!a-antha deposits $&50 into an account and one year later has $&70. Dhat interest rate 1as paid on !a-antha>s depositB a. 8 percent b. ; percent c. 10 percent d. one of the above is correct. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." %uture value 4&.
#oni put $500 into an account and one year later she had $534. Dhat interest rate 1as paid on #oni>s depositB a. 7.1 percent b. 5.; percent c. 7.8 percent d. one of the above is correct. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Meff put $75 into an account and one year later had $100. Dhat interest rate 1as paid on Meff>s depositB a. &0 percent b. &5 percent c. &8 percent d. one of the above is correct. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
!usan put $375 into an account and one year later had $405. Dhat interest rate 1as paid on !usan>s depositB a. 5 percent b. 7 percent c. 8 percent d. 10 percent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
?ector puts $150 into an account 1hen the interest rate is 4 percent. *ater he chec9s his balance and finds he has about $178.73. ?o1 lon0 did ?ector 1ait to chec9 his balanceB a. 3 years b. 3.5 years c. 4 years d. 4.5 years

A !" A A#" Analytic #+." %uture value 47. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
33
/arcia has four savin0s accounts. Dhich account has the lar0est balanceB a. $100 deposited 1 year a0o at an 8 percent interest rate b. $100 deposited & years a0o at a 4 percent interest rate c. $100 deposited 4 years a0o at a & percent interest rate d. $100 deposited 8 years a0o at a 1 percent interest rate $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
Eeor0e puts $&00 into an account 1hen the interest rate is 8 percent. *ater he chec9s his balance and finds that he has a balance of about $&7&.10. ?o1 -any years did he 1ait to chec9 his balanceB a. 3 years b. 3.5 years c. 4 years d. 4.5 years $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
*ucretia puts $400 into an account 1hen the interest rate is 10 percent. *ater she chec9s her balance and finds it@s 1orth about $708.7&. ?o1 -any years did she 1ait to chec9 her balanceB a. 5 years b. 7 years c. 7 years d. 8 years $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." %uture value 4;.
Alice says that the present value of $700 to be received one year frotoday if the interest rate is 7 percent is less than the present value of $700 to be received t1o years frotoday if the interest rate is 3 percent. <eth says that $700 saved for one year at 7 percent interest has a s-aller future value than $700 saved for t1o years at 3 percent interest. a. <oth Alice and <eth are correct. b. <oth Alice and <eth are incorrect. c. +nly Alice is correct. d. +nly <eth is correct.
A !" $ $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %uture value : .resent value /!," Applicative 50. <raden says that $400 saved for one year at 4 percent interest has a s-aller future value than $400 saved for t1o years at & percent interest. *efty says that the present value of $400 to be received one year frotoday if the interest rate is 4 percent e2ceeds the present value of $400 to be received t1o years frotoday if the interest rate is & percent. a. <raden and *efty are both correct. b. <raden and *efty are both incorrect. c. +nly <raden is correct. d. +nly *efty is correct.
A !" A $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %uture value : .resent value /!," Applicative
34
51.

Mohn says that the future value of $&50 saved for one year at 7 percent interest is less than the future value of $&50 saved for t1o years at 3 percent interest. Eeor0e says that the present value of a $&50 pay-ent to be received in one year 1hen the interest rate is 7 percent is less than the value of a $&50 pay-ent to be received in t1o years 1hen the interest rate is 3 percent. a. Mohn and Eeor0e are both correct. b. Mohn and Eeor0e are both incorrect. c. +nly Mohn is correct. d. +nly Eeor0e is correct.
A !" , $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %uture value : .resent value /!," Applicative 5&. #hree people 0o to the ban9 to cash in their accounts. A-y had her -oney in an account for &5 years at 4 percent interest. <ill had his -oney in an account for &0 years at 5 percent interest. ,elia had her -oney in an account for 5 years at &0 percent interest. If each of the- ori0inally deposited $500 in their accounts, 1hich of the- 0ets the -ost -oney 1hen they cash in their accountsB a. A-y b. <ill c. ,elia d. #hey each 0et the sa-e a-ount. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Neronica deposited $1,000 into an account t1o years a0o. #he first year she earned 7 percent interestG the second year she earned 5 percent. ?o1 -uch -oney does Neronica have in her account todayB a. $1,133.31 b. $1,1&0.00 c. $1,1&3.50 d. one of the above are correct to the nearest cent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
%eli2 deposited $500 into an account t1o years a0o. #he first year he earned 3 percent interest and the second year he earned 5 percent interest. ?o1 -uch -oney does %eli2 have in his account no1B a. $540.75 b. $540.80 c. $540.85 d. one of the above are correct to the nearest cent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Mor0e deposited $1,000 into an account three years a0o. #he first t1o years he earned 5 percent interestG the third year he earned 7 percent interest. ?o1 -uch -oney does Mor0e have in his account todayB a. $1,157.;0 b. $1,178.75 c. $1,177.00 d. one of the above are correct to the nearest cent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." %uture value

57.
35
Anna deposited $10,000 into an account three years a0o. #he first year she earned 1& percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. ?o1 -uch -oney does she have in her account todayB a. $1&,57;.84 b. $1&,5;7.80 c. $1&,5;7.1& d. one of the above are correct to the nearest cent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Jour accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the ne2t three years, you 1ill have $;;8.&5 in your account. If your accountant is correct, 1hat is the current interest rateB a. ; percent b. 10 percent c. 11 percent d. 1& percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Jour accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the ne2t t1o years you 1ill have $8;8.88 in your account. If your accountant is correct 1hat is the current interest rateB a. 7 percent b. 7 percent c. 8 percent d. ; percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." %uture value 5;.
Jour accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you 1ill have about $;83.58. If your accountant is correct, 1hat is the current rate of interestB a. 5 percent b. 7 percent c. 7 percent d. 8 percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Jour financial advisor tells you that if you earn the historical rate of return on a certain -utual fund, then in three years your $&0,000 1ill 0ro1 to $&3,15&.50. Dhat rate of interest does your financial advisor e2pect you to earnB a. 5 percent b. 7 percent c. 7 percent d. 8 percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." %uture value
37
71.

'obert put $15,000 into an account 1ith a fi2ed interest rate t1o years a0o and no1 the account balance is $17,7;5.38. Dhat rate of interest did 'obert earnB a. 4.5 percent b. 5.5 percent c. 7.5 percent d. 8.0 percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
#he price of a bond is eCual to the su- of the present values of its future pay-ents. !uppose a certain bond pays $50 one year frotoday and $1,050 t1o years frotoday. Dhat is the price of the bond if the interest rate is 5 percentB a. $1,050.00 b. $1,045.35 c. $1,000.00 d. $;45.35 $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
#he price of a bond is eCual to the su- of the present value of its future pay-ents. !uppose a certain bond pays $50 one year frotoday, and $1,050 t1o years frotoday. Dhat is the price of this bond if the interest rate is 5 percentB a. $1,000 b. $1,050 c. $1,100 d. one of the above is correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
#onya put $&50 into an account three years a0o. #he first year he earned 7 percent interest, the second year 7 percent, and the third year 8 percent. About ho1 about -uch does #onya have in her account no1B a. $30&.50 b. $307.&3 c. $308.77 d. $30;.3; $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
I-a0ine that t1o years a0o you inherited $&0,000 and put it into an account payin0 a fi2ed 8 percent annual interest rate. ?o1 -uch -oney do you have in your account no1B a. $&&,880.00 b. $&3,&00.00 c. $&3,&3&.00 d. $&3,3&8.00 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." %uture value

77.
37
Jou are 0iven three options. Jou -ay have the balance in an account that has been collectin0 5 percent interest for &0 years, the balance in an account that has been collectin0 10 percent interest for 10 years, or the balance in an account that has been collectin0 &0 percent interest for five years. (ach account had the sa-e ori0inal balance. Dhich account no1 has the lowest balanceB a. the first one b. the second one c. the third one d. #hey all have the sa-e balance. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Eeor0e has $300 in a ban9 account. !o-e years a0o he put $&13.&0 into this account, and it has earned 5 percent interest every year since then. ?o1 -any years a0o did he open his accountB a. 4 years b. 5 years c. 7 years d. 7 years $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Dhen he 1as 18, Eerald put $100 into an account at an interest rate of 8 percent. ?e no1 has $171.38 in this account. %or ho1 -any years did Eerald leave this -oney in his accountB a. 5 years b. 7 years c. 7 years d. 8 years $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." %uture value 7;.
%our years a0o *enny deposited so-e -oney into an account. ?e earned 5 percent interest on this account and no1 it has a balance of $303.88. About ho1 -uch -oney did *enny deposit into his account 1hen he opened itB a. $&10 b. $&&0 c. $&40 d. $&50 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
#1o years a0o <rian put so-e -oney into an account. ?e earned 7 percent interest on this account and no1 has about $1,000. About ho1 -uch did he deposit into his account t1o years a0oB a. about $870 b. about $870 c. about $880 d. about $8;0 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." %uture value
38
71.

+n /ay &5, 1;78 three pals 0raduated fro- hi0h school, pooled to0ether $1,000 and put the -oney into an account pro-isin0 to pay 8O for the ne2t 30 years. +n /ay &5, &008 they 1ithdre1 all the -oney fro- the account. #o the nearest dollar, ho1 -uch did they 1ithdra1B a. $&,400 b. $10,073 c. $3&,400 d. one of the above are correct to the nearest dollar. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
<rittany 1ants to have about $500,000 1hen she retires in 10 years. !he has $&00,000 to deposit no1. At 1hich of the follo1in0 interest rates 1ould her deposit co-e closest to $500,000 after 10 yearsB a. ;.7 percent b. ;.8 percent c. 10 percent d. 10.& percent $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Jou 1ant to have $100,000 in five years. If the interest rate is 8 percent, about ho1 -uch do you need to have todayB a. $77,&&5.&5 b. $77,557.4& c. $78,058.3& d. $71,4&8.57 $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Al, 'alph, and !tan are all intendin0 to retire. (ach currently has $1 -illion in assets. Al 1ill earn 17O interest and retire in t1o years. 'alph 1ill earn 8O interest and retire in four years. !tan 1ill earn 4O interest and retire in ei0ht years. Dho 1ill have the lar0est su- 1hen he retiresB a. Al b. 'alph c. !tan d. #hey all retire 1ith the sa-e a-ount. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
!a0e decides to cash in all his savin0s to open a recordin0 studio. ?e has three accounts to cash in. #he first earned ; percent for t1o years. #he second earned 7 percent for three years. And the last earned 3 percent for si2 years. !upposin0 he started 1ith $5,000 in each account, fro- 1hich account 1ill he 0et the -ost cashB a. the t1o)year account at ; percent b. the three)year account at 7 percent c. the si2)year account at 3 percent d. #he accounts are all 1orth the sa-e. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Dhich of the follo1in0 is the correct e2pression for findin0 the present value of a $1,000 pay-ent one year frotoday if the interest rate is 7 percentB a. $1,000 41.076 b. $1,00041.076 c. $1,000341.076 d. one of the above is correct.

A !" , A#" Analytic #+." .resent value 77. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
3;
Dhat is the present value of a pay-ent of $100 to be -ade one year fro- todayB a. $100P41 5 r6 b. $100341 5 r6 c. $100 ) $100 r d. $100 ) 41 5 r63$100 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
Dhich of the follo1in0 is the correct e2pression for findin0 the present value of a $500 pay-ent t1o years frotoday if the interest rate is 4 percentB a. $500341.046& b. $500 ) 50041.046& c. $500 ) $50034.046& d. one of the above is correct. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." .resent value 7;.
A scholarship 0ives you $1,000 today and pro-ises to pay you $1,000 one year frotoday. Dhat is the present value of these pay-entsB a. $&,000341 5 r6&. b. $1,000 5 $1,000341 5 r6 c. $1,000341 5 r6 5 $1,000341 5 r6& d. $1,00041 5 r6 5 $1,00041 5 r6& $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
Dhich of the follo1in0 chan0es 1ould increase the present value of a future pay-entB a. a decrease in the siFe of the pay-ent b. an increase in the ti-e until the pay-ent is -ade c. a decrease in the interest rate d. All of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Dhich of the follo1in0 chan0es 1ould decrease the present value of a future pay-entB a. a decrease in the siFe of the pay-ent b. an increase in the ti-e until the pay-ent is -ade c. an increase in the interest rate d. All of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
A !" $ A#" Analytic #+." .resent value 8&.
Dhich of the follo1in0 chan0es 1ould increase the present value of a future pay-entB a. an increase in the siFe of the pay-ent b. an increase in the ti-e until the pay-ent is -ade c. an increase in the interest rate d. All of the above are correct. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
A !" A A#" Analytic #+." .resent value
40
83.

#he present value of a pay-ent to be -ade in the future falls as a. the interest rate rises and the ti-e until the pay-ent is -ade increases. b. the interest rate rises and the ti-e until the pay-ent is -ade decreases. c. the interest rate falls and the ti-e until the pay-ent is -ade increases. d. the interest rate falls and the ti-e until the pay-ent is -ade decreases. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Jou are e2pectin0 to receive $1,000 at so-e ti-e in the future. Dhich of the follo1in0 1ould una-bi0uously decrease the present value of this future pay-entB a. Interest rates rise and you 0et the pay-ent sooner. b. Interest rates rise and you have to 1ait lon0er for the pay-ent. c. Interest rates fall and you 0et the pay-ent sooner. d. Interest rates fall and you have to 1ait lon0er to 0et the pay-ent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Jou are e2pectin0 to receive $750 at so-e ti-e in the future. Dhich of the follo1in0 1ould una-bi0uously increase the present value of this future pay-entB a. Interest rates rise and you 0et the pay-ent sooner. b. Interest rates rise and you have to 1ait lon0er for the pay-ent. c. Interest rates fall and you 0et the pay-ent sooner. d. Interest rates fall and you have to 1ait lon0er to 0et the pay-ent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Jou have been pro-ised a pay-ent of $30,000 in the future. In 1hich case is the present value of this pay-ent hi0hestB a. Jou receive the pay-ent 3 years fro- no1 and the interest rate is 8 percent. b. Jou receive the pay-ent 3 years fro- no1 and the interest rate is 7 percent. c. Jou receive the pay-ent & years fro- no1 and the interest rate is 8 percent. d. Jou receive the pay-ent & years fro- no1 and the interest rate is 7 percent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
Jou have been pro-ised a pay-ent of $400 in the future. In 1hich case is the present value of this pay-ent hi0hestB a. Jou receive the pay-ent 4 years fro- no1 and the interest rate is 4 percent. b. Jou receive the pay-ent 4 years fro- no1 and the interest rate is 5 percent. c. Jou receive the pay-ent 5 years fro- no1 and the interest rate is 4 percent. d. Jou receive the pay-ent 5 years fro- no1 and the interest rate is 5 percent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
At 1hich interest rate is the present value of $7;.50 one year frotoday eCual to $75 todayB a. 4 percent b. 5 percent c. 7 percent d. 7 percent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." .resent value

8;. At 1hich interest rate is the present value of $;5.40 one year frotoday eCual to $;0 todayB a. 4 percent b. 5 percent c. 7 percent d. 7 percent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
41
A !" , A#" Analytic #+." .resent value ;0.
At 1hich interest rate is the present value of $17&.&4 t1o years frotoday eCual to $150 todayB a. 4 percent b. 5 percent c. 7 percent d. one of the above 1ould 0ive a present value 1ithin a cent of $17&.&4. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." .resent value ;1.
At 1hich interest rate is the present value of $18;.&8 t1o years frotoday eCual to $175 todayB a. & percent b. 4 percent c. 7 percent d. 8 percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." .resent value ;&.
Dhat is the present value of a pay-ent of $100 one year frotoday if the interest rate is 5 percentB a. $;5.50 b. $;5.&4 c. $;5.00 d. one of the above are correct to the nearest cent. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." .resent value ;3.
Dhat is the present value of a pay-ent of $150 one year frotoday if the interest rate is 7 percentB a. $141.11 b. $141.37 c. $141.75 d. one of the above are correct to the nearest cent. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." .resent value ;4.
Dhat is the present value of a pay-ent of $&50 one year frotoday if the interest rate is 4 percentB a. $&40.38 b. $&4&.&4 c. $&44.40 d. one of the above are correct to the nearest cent. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
At 1hich interest rate is the present value of $&70.10 t1o years frotoday eCual to $&50 todayB a. & percent b. 3 percent c. 4 percent d. 5 percent
4&

$I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
At 1hich interest rate is the present value of $135.&0 t1o years frotoday eCual to $1&5 todayB a. & percent b. 4 percent c. 7 percent d. 8 percent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" < A#" Analytic #+." .resent value ;7.
At 1hich interest rate is the present value of $35.00 t1o years frotoday eCual to about $30.00 todayB a. 5 percent b. 7 percent c. 7 percent d. 8 percent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" $ A#" Analytic #+." .resent value ;8.
Dhat is the present value of a pay-ent of $100 to be -ade one year frotoday if the interest rate is 5 percentB a. $105.&7 b. $105.00 c. $;5.&4 d. $;5.00 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" , A#" Analytic #+." .resent value ;;.
+f the follo1in0 interest rates, 1hich is the highest one at 1hich you 1ould prefer to have $&00 ten years frotoday instead of $100 todayB a. & percent b. 4 percent c. 7 percent d. 8 percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
100. Dhat is the present value of a pay-ent of $&00 to be -ade one year frotoday if the interest rate is 10 percentB a. $180 b. $181.8& c. $&&0 d. $&&&.&& A !" < A#" Analytic #+." .resent value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
101. If the interest rate is 5 percent, 1hat is the present value of a pay-ent of $500 to be -ade one year frotodayB a. $457.14 b. $475.00 c. $480.77 d. one of the above are correct to the nearest cent.

A !" $ A#" Analytic #+." .resent value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
43
10&. +f the follo1in0 interest rates, 1hich is the highest one at 1hich the present value of $&00 ten years frotoday is 0reater than $150B a. & percent b. 4 percent c. 7 percent d. 8 percent A !" A A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
103. Jou have a bond that entitles you to a one)ti-e pay-ent of $10,000 one year fro- no1. #he interest rate is 10 percent per year. ?o1 -uch is the bond 1orth todayB a. $;,0;0.;1 b. $10,000.00 c. $8,&74.47 d. ;,5&3.81 A !" A A#" Analytic #+." .resent value 104. $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
atasha pro-ises to pay Mennifer $1,000 in t1o years. If the interest rate is 7 percent, ho1 -uch is this future pay-ent 1orth todayB a. $883.70 b. $887.;7 c. $8;0.00 d. one of the above are correct to the nearest cent. $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
105. At 1hich interest rate is the present value of $183.70 t1o years frotoday eCual to about $173.07 todayB a. & percent b. 3 percent c. 4 percent d. 5 percent A !" < A#" Analytic #+." .resent value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
107. At 1hich interest rate is the present value of $370 three years frotoday eCual to about $3&0 todayB a. 4 percent b. 4.5 percent c. 5 percent d. 5.5 percent A !" A A#" Analytic #+." .resent value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
107. Assu-in0 the interest rate is 7 percent, 1hich of the follo1in0 has the 0reatest present valueB a. $300 paid in t1o years b. $150 paid in one year plus $140 paid in t1o years c. $100 paid today plus $100 paid in one year plus $100 paid in t1o years d. $&85 today
44

A !" $ A#" Analytic #+." .resent value
108. Assu-in0 the interest rate is 5 percent, 1hich of the follo1in0 has the 0reatest present valueB a. $&40 paid in three years b. $&&5 paid in t1o years c. $&10 paid in one year d. $&00 today A !" A A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
10;. !uppose the interest rate is 4 percent. Dhich of the follo1in0 has the 0reatest present valueB a. $100 today plus $1;0 one year frotoday b. $150 today plus $140 one year frotoday c. $&00 today plus $;0 one year frotoday d. $&50 today plus $40 one year frotoday A !" $ A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
110. !uppose the interest rate is 7 percent. ,onsider four pay-ent options" +ption A" $500 today. +ption <" $550 one year frotoday. +ption ," $575 t1o years frotoday. +ption $" $700 three years frotoday. Dhich of the pay-ents has the highest present value todayB a. +ption A b. +ption < c. +ption , d. +ption $ A !" < A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
111. !uppose the interest rate is 7 percent. ,onsider four pay-ent options" +ption A" $500 today. +ption <" $550 one year frotoday. +ption ," $575 t1o years frotoday. +ption $" $700 three years frotoday. Dhich of the pay-ents has the lowest present value todayB a. +ption A b. +ption < c. +ption , d. +ption $ A !" $ A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative

11&. !uppose the interest rate is 8 percent. ,onsider three pay-ent options" 1. $&00 today. &. $&&0 one year frotoday. 3. $&40 t1o years frotoday. Dhich of the follo1in0 is correctB a. 1 has the hi0hest present value and & has the lo1est. b. & has the hi0hest present value and 3 has the lo1est. c. 3 has the hi0hest present value and 1 has the lo1est. d. one of the above is correct. A !" , A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
45
113. !uppose the interest rate is 5 percent. ,onsider three pay-ent options" 1. $500 today. &. $5&0 one year frotoday. 3. $550 t1o years frotoday. Dhich of the follo1in0 is correctB a. 1 has the lo1est present value and 3 has the hi0hest. b. & has the lo1est present value and 1 has the hi0hest. c. 3 has the lo1est present value and & has the hi0hest. d. one of the above is correct. A !" < A#" Analytic #+." .resent value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
114. Dhich, if any, of the present values belo1 are co-puted correctlyB a. A pay-ent of $100 to be received one year frotoday, 1ith a & percent interest rate, has a present value of $;8.81. b. A pay-ent of $&00 to be received t1o years frotoday, 1ith a 3 percent interest rate, has a present value of $188.5&. c. A pay-ent of $300 to be received three years frotoday, 1ith a 4 percent interest rate, has a present value of $&34.34. d. one of the above are correct to the nearest cent. A !" < A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
115. !uppose the interest rate is 8 percent. ,onsider three pay-ent options. 1. $300 today. &. $330 one year frotoday. 3. $370 t1o years frotoday. Dhich of the follo1in0 is correctB a. 1 has the hi0hest present value and & has the lo1est. b. & has the hi0hest present value and 3 has the lo1est. c. 3 has the hi0hest present value and 1 has the lo1est. d. one of the above is correct. A !" , A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
47
117. Dhich, if any, of the present values belo1 are correctly co-putedB a. A pay-ent of $1,000 to be received one year frotoday, 1ith a 8 percent interest rate, has a present value of $;45.45. b. A pay-ent of $1,000 to be received one year frotoday, 1ith a ; percent interest rate, has a present value of $;11.11. c. A pay-ent of $1,000 to be received one year frotoday, 1ith a 10 percent interest rate, has a present value of $;05.07. d. one of the above are correct to the nearest cent. A !" $ A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
117. Dhich of the follo1in0 has a present value of $100B a. $110 in t1o years 1hen the interest rate is 5 percent b. $11&.37 in t1o years 1hen the interest rate is 7 percent c. $117.4; in t1o years 1hen the interest rate is 7 percent d. one of the above are correct to the nearest cent. A !" < A#" Analytic #+." .resent value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
118. Jou have a choice a-on0 three options. +ption 1" receive $;00 i--ediately. +ption &" receive $1,&00 one year fro- no1. +ption 3" receive $&,000 five years fro- no1. #he interest rate is 15 percent. 'an9 these three options fro- hi0hest present value to lo1est present value. a. +ption 1G +ption &G +ption 3 b. +ption 3G +ption &G +ption 1 c. +ption &G +ption 3G +ption 1 d. +ption 3G +ption 1G +ption & A !" , A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
11;. !uppose you 1in a s-all lottery and you are 0iven the follo1in0 choice" Jou can 416 receive an i--ediate pay-ent of $10,000 or 4&6 three annual pay-ents, each in the a-ount of $3,700, 1ith the first pay-ent co-in0 one year fro- no1, the second t1o years fro- no1, and the third three years fro- no1. Jou 1ould choose to ta9e the three annual pay-ents if the interest rate is a. & percent, but not if the interest rate is 3 percent. b. 3 percent, but not if the interest rate is 4 percent. c. 4 percent, but not if the interest rate is 5 percent. d. 5 percent, but not if the interest rate is 7 percent. A !" < A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
1&0. A 8ud0e reCuires ?arry to -a9e a pay-ent to !ally. #he 8ud0e says that ?arry can pay her either $10,000 today or $11,000 t1o years frotoday. +f the follo1in0 interest rates, 1hich is the highest one at 1hich ?arry 1ould be better off payin0 the -oney todayB a. 3 percent b. 4 percent c. 5 percent d. 7 percent A !" < A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative

1&1. Jou have a contract 1ith so-eone 1ho has a0reed to pay you $&0,000 in four years. !he offers to pay you no1 instead. %or 1hich of the follo1in0 interest rates and pay-ents 1ould you ta9e the -oney todayB. a. 8 percent, $15,000 b. 7 percent, $17,000 c. 7 percent, $17,000 d. All of the above are correct. A !" $ A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
47
1&&. Dhich of the follo1in0 is correct if the interest rate is 7 percentB a. $&15 to be received a year frotoday has a present value of over $&00G $4&0 a year fro- no1 has a present value over $400. b. $&15 to be received a year frotoday has a present value of over $&00G $4&0 a year fro- no1 has a present value under $400. c. $&15 to be received a year frotoday has a present value of under $&00G $4&0 a year fro- no1 has a present value over $400. d. $&15 to be received a year frotoday has a present value of under $&00G $4&0 a year fro- no1 has a present value under $400. A !" < A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
1&3. +ther thin0s the sa-e, 1hen the interest rate rises, the present value of future revenues fro- invest-ent pro8ects a. rises, so invest-ent spendin0 rises. b. falls, so invest-ent spendin0 rises. c. rises, so invest-ent spendin0 falls. d. falls, so invest-ent spendin0 falls. A !" $ $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 1&4. /i2ster ,oncrete ,o-pany is considerin0 buyin0 a ne1 ce-ent truc9. #he o1ners and their accountants decide that this is the profitable thin0 to do. <efore they can buy the truc9, the interest rate and price of truc9s chan0e. In 1hich case do these chan0es both -a9e the- less li9ely to buy the truc9B a. Interest rates rise and truc9 prices rise. b. Interest rates fall and truc9 prices rise. c. Interest rates rise and truc9 prices fall. d. Interest rates fall and truc9 prices fall. A !" A $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Applicative 1&5. ?eart>s 'estaurants considered buildin0 a restaurant in a ne1 location. #he o1ners and their accountants decided that this 1as not the profitable thin0 to do. ?o1ever, soon after they -ade this decision, both the interest rate and the cost of buildin0 the restaurant chan0ed. In 1hich case do these chan0es both -a9e it -ore li9ely that they 1ill no1 build the restaurantB a. Interest rates rise and the cost of buildin0 the restaurant rises. b. Interest rates rise and the cost of buildin0 the restaurant falls. c. Interest rates fall and the cost of buildin0 the restaurant rises. d. Interest rates fall and the cost of buildin0 the restaurant falls. A !" $ $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Applicative
48
1&7. ?ydroEro1 is considerin0 buildin0 a ne1 0reenhouse in 1hich to 0ro1 to-atoes. #he board -eets and decides that this is the ri0ht thin0 to do. <efore they can put their plans into action, the interest rate increases. #he present value of the returns fro- this invest-ent pro8ect a. is no1 lo1er than it 1as before, and so ?ydro Ero1 is less li9ely to build the buildin0. b. is no1 lo1er than it 1as before, and so ?ydroEro1 is -ore li9ely to build the buildin0. c. is no1 hi0her than it 1as before, and so ?ydroEro1 is less li9ely to build the buildin0. d. is no1 hi0her than it 1as before, and so ?ydroEro1 is -ore li9ely to build the buildin0. A !" A $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 1&7. ?appy #rails, a bicycle rental co-pany, is considerin0 purchasin0 three additional bicycles. (ach bicycle 1ould cost the- $&4;.77. At the end of the first year the increase to their revenues 1ould be $140 per bicycle. At the end of the second year the increase to their revenues a0ain 1ould be $140 per bicycle. #hereafter, there are no increases to their revenues. At 1hich of the follo1in0 interest rates is the su- of the present values of the additional revenues closest to the price of a bicycleB a. 5 percent b. 7 percent c. 7 percent d. 8 percent A !" $ $I%" 3 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 1&8. $obson ,onstruction has an invest-ent pro8ect that 1ould cost $150,000 today and yield a one)ti-e payoff of $177,000 in three years. Dhat is the hi0hest interest rate at 1hich $obson 1ould find this pro8ect profitableB a. 7O b. 7O c. 5O d. It is not profitable at any of these interest rates. A !" $ $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 1&;. $obson ,onstruction has an invest-ent pro8ect that 1ould cost $150,000 today and yield a one)ti-e payoff of $177,000 in t1o years. A-on0 the follo1in0 interest rates, 1hich is the hi0hest one at 1hich $obson 1ould find this pro8ect profitableB a. 7O b. 7O c. 5O d. 4O A !" , $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 130. #he Q) ine do0 food co-pany is considerin0 the purchase of additional cannin0 eCuip-ent. #hey e2pect that addin0 the eCuip-ent 1ill yield $&00,000 at the end of the first year and $&50,000 at the end of the second year and then nothin0 after that. At 1hich of the follo1in0 prices and interest rates 1ould Q) ine buy the eCuip-entB a. $415,000 if the interest rate is 5O b. $41;,000 if the interest rate is 4O c. Q) ine 1ould buy the eCuip-ent in both cases. d. Q) ine 1ould not buy the eCuip-ent in either case. A !" , A#" Analytic #+." .resent value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
4;
131. !o-eti-es +n #i-e 4!+#6 Airlines is considerin0 buyin0 a ne1 8et. !+# 1ould be -ore li9ely to buy a ne1 8et if there 1ere either a. a decrease in the price of a ne1 8et or a decrease in the interest rate. b. a decrease in the price of a ne1 8et or an increase in the interest rate. c. an increase in the price of a ne1 8et or a decrease in the interest rate. d. an increase in the price of a ne1 8et or an increase in the interest rate. A !" A $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : .resent value /!," Analytical 13&. A fir- has three different invest-ent options, each costin0 $10 -illion. +ption A 1ill 0enerate $1& -illion in revenue at the end of one year. +ption < 1ill 0enerate $15 -illion in revenue at the end of t1o years. +ption , 1ill 0enerate $18 -illion in revenue at the end of three years. Dhich option should the fir- chooseB a. +ption A b. +ption < c. +ption , d. #he ans1er depends on the rate of interest, 1hich is not specified here. A !" $ A#" Analytic #+." Invest-ent $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
133. A fir- has three different invest-ent options. +ption A 1ill 0ive the fir- $10 -illion at the end of one year, $10 -illion at the end of t1o years, and $10 -illion at the end of three years. +ption < 1ill 0ive the fir- $15 -illion at the end of one year, $10 -illion at the end of t1o years, and $5 -illion at the end of three years. +ption , 1ill 0ive the fir- $30 -illion at the end of one year, and nothin0 thereafter. Dhich of these options has the hi0hest present valueB a. +ption A b. +ption < c. +ption , d. #he ans1er depends on the rate of interest, 1hich is not specified here. A !" , A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
134. A fir- has four different invest-ent options. +ption A 1ill 0ive the fir- $10 -illion at the end of one year, $10 -illion at the end of t1o years, and $10 -illion at the end of three years. +ption < 1ill 0ive the fir- $5 -illion at the end of one year, $10 -illion at the end of t1o years, and $15 -illion at the end of three years. +ption , 1ill 0ive the fir- $15 -illion at the end of one year, $10 -illion at the end of t1o years, and $5 -illion at the end of three years. +ption $ 1ill 0ive the fir- $&1 -illion at the end of one year, nothin0 at the end of t1o years, and $; -illion at the end of three years. Dhich of these options has the hi0hest present value if the rate of interest is 5 percentB a. +ption A b. +ption < c. +ption , d. +ption $ A !" $ A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
135. =.!. .hones is considerin0 buyin0 ne1 eCuip-ent to build a factory. If the interest rate rises, a. the present value of the returns fro- the factory 1ill fall, so =.!. .hones 1ill be less li9ely to build the factory. b. the present value of the returns fro- the factory 1ill fall, so =.!. .hones 1ill be -ore li9ely to build the factory. c. the present value of the returns fro- the factory 1ill rise, so =.!. .hones 1ill be less li9ely to build the factory. d. the present value of the returns fro- the factory 1ill rise, so =.!. .hones 1ill be -ore li9ely to build the factory.
50
A !" A $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : .resent value /!," Applicative 137. A =niversity of Io1a bas9etball standout is offered a choice of contracts by the e1 Jor9 *iberty. #he first one 0ives her $100,000 one year frotoday and $100,000 t1o years frotoday. #he second one 0ives her $13&,000 one year frotoday and $77,000 t1o years frotoday. As her a0ent, you -ust co-pute the present value of each contract. Dhich of the follo1in0 interest rates is the lowest one at 1hich the present value of the second contract e2ceeds that of the firstB a. 7 percent b. 8 percent c. ; percent d. 10 percent A !" A A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
137. A car salesperson 0ives you four alternative 1ays to pay for your car. #he first is to pay $18,000 today. #he second is to pay $1;,000 one year frotoday. #he third is to pay $&0,300 t1o years frotoday. #he fourth is to pay $&1,500 three years frotoday. If the interest rate is 7 percent, 1hich pay-ent option has the lo1est present value and 1hich has the hi0hestB a. #he first is lo1estG the second is hi0hest. b. #he second is lo1estG the third is hi0hest. c. #he third is lo1estG the fourth is hi0hest. d. #he fourth is lo1estG the first is hi0hest. A !" < A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
138. #he You Look Marvelous! cos-etic co-pany is considerin0 buildin0 a ne1 sha-poo factory. Its accountants and board of directors -eet and decide that it is not a 0ood idea to build the factory. If interest rates fall after the -eetin0 a. the present value of the factory rises. It>s -ore li9ely the co-pany 1ill build the factory. b. the present value of the factory rises. It>s less li9ely the co-pany 1ill build the factory. c. the present value of the factory falls. It>s -ore li9ely the co-pany 1ill build the factory. d. the present value of the factory falls. It>s less li9ely the co-pany 1ill build the factory. A !" A $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 13;. Qastle ,orporation is considerin0 buildin0 a ne1 plant. It 1ill cost $1 -illion today to build it and it 1ill 0enerate revenues of $1.1&1 -illion three years frotoday. +f the interest rates belo1, 1hich is the highest interest rate at 1hich Qastle 1ould still be 1illin0 to build the plantB a. 3 percent b. 3.5 percent c. 4 percent d. 4.5 percent A !" < $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 140. Joyo@s %roFen Jo0urt, Inc. is thin9in0 of buildin0 a ne1 1arehouse. #hey believe that this 1ill 0iven the$50,000 of additional revenue at the end of one year, $70,000 additional revenue at the end of t1o years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Joyo 1ould be 1illin0 to pay a. $140,000, but not $150,000. b. $150,000, but not $170,000. c. $170,000, but not $170,000. d. $170,000, but not $180,000.

A !" , $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : Invest-ent /!," Analytical 141. #he concept of present value helps e2plain 1hy a. invest-ent decreases 1hen the interest rate increases, and it also helps e2plain 1hy the Cuantity of loanable funds de-anded decreases 1hen the interest rate increases. b. invest-ent decreases 1hen the interest rate increases, but it is of no help in e2plainin0 1hy the Cuantity of loanable funds de-anded decreases 1hen the interest rate increases. c. the Cuantity of loanable funds de-anded decreases 1hen the interest rate increases, but it is of no help in e2plainin0 1hy invest-ent decreases 1hen the interest rate increases. d. one of the above are correctG the concept of present value is of no help in e2plainin0 1hy either invest-ent or the Cuantity of loanable funds de-anded decreases 1hen the interest rate increases. A !" A $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : .resent value /!," Applicative
51
14&. Dhich of the follo1in0 concepts is -ost helpful in e2plainin0 1hy invest-ent increases 1hen the interest rate fallsB a. dead1ei0ht loss b. present value c. econo-ic 0ro1th d. financial inter-ediation A !" < $I%" & '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : .resent value /!," Applicative 143. +ther thin0s the sa-e, an increase in the interest rate -a9es the Cuantity of loanable funds de-anded a. rise, and invest-ent spendin0 rise. b. rise, and invest-ent spendin0 fall. c. fall, and invest-ent spendin0 rise. d. fall, and invest-ent spendin0 fall. A !" $ $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : *oanable funds /!," Applicative 144. +ther thin0s the sa-e, an increase in the interest rate -a9es the Cuantity of loanable funds supplied a. rise, and invest-ent spendin0 rise. b. rise, and invest-ent spendin0 fall. c. fall, and invest-ent spendin0 rise. d. fall, and invest-ent spendin0 fall. A !" < $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Invest-ent : *oanable funds /!," Applicative 145. Dhich of the follo1in0 is the lar0estB a. the future value of $&50 1ith 3O interest for & years b. the future value of $&50 at &O interest for 3 years c. the present value of $&50 to be paid in t1o years 1hen the interest rate is 3O d. the present value of $&50 to be paid in three years 1hen the interest rate is &O A !" < $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : %uture value /!," Analytical 147. If the interest rate is r percent, then the rule of 70 says that your savin0s 1ill double about every a. 70341 ) r6 years. b. 70341 5 r6 years. c. 703r years. d. 7041 5 r63r years.
5&

$I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" , A#" Analytic #+." 'ule of 70
147. 'ita puts $10,000 into each of t1o different assets. #he first asset pays 10 percent interest and the second pays 5 percent. Accordin0 to the rule of 70, 1hat is the appro2i-ate difference in the value of the t1o assets after 14 yearsB a. $1&,000 b. $14,000 c. $15,500 d. $&0,000 A !" $ A#" Analytic #+." 'ule of 70 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
148. #he rule of 70 can be stated as follo1s" A variable 1ith a 0ro1th rate of X percent per year a. doubles every 703X years. b. doubles every 7041 ) 13X6 years. c. doubles every 703X& years. d. doubles every 70341 ) X6 years. A !" A A#" Analytic #+." 'ule of 70 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
14;. Accordin0 to the rule of 70, if the interest rate is 10 percent, about ho1 lon0 1ill it ta9e for the value of a savin0s account to doubleB a. about 7.3 years b. about 7 years c. about 7.7 years d. about 10 years A !" < A#" Analytic #+." 'ule of 70 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
150. Accordin0 to the rule of 70, if the interest rate is 5 percent, ho1 lon0 1ill it ta9e for the value of a savin0s account to doubleB a. about 3.5 years b. about 7.3 years c. about 1& years d. about 14 years A !" $ A#" Analytic #+." 'ule of 70 $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
151. !ari puts $100 into an account 1ith an interest rate of 10 percent. Accordin0 to the rule of 70, about ho1 -uch does she have at the end of &1 yearsB a. $&10 b. $300 c. $800 d. $1,010 A !" , A#" Analytic #+." 'ule of 70 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical

15&. ancy 1ould li9e to double the -oney in her retire-ent account in five years. Accordin0 to the rule of 70, 1hat rate of interest 1ould she need to earn to attain her ob8ectiveB a. 5 percent b. 7 percent c. 10 percent d. 14 percent $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
53
A !" $ A#" Analytic #+." 'ule of 70
153. #1enty years a0o, $r. /ont0o-ery borro1ed -oney fro- her parents to pay her tuition at 0raduate school. o1 she 1ants to pay the- bac9. !he 0ives the- double 1hat they 0ave her. Accordin0 to the rule of 70, 1hat interest rate 1ould have 0iven her parents the sa-e a-ount of -oney if they had put it in the ban9 rather than lendin0 it to their dau0hterB a. 3.5 percent b. 4.5 percent c. 5 percent d. 7 percent A !" A A#" Analytic #+." 'ule of 70 $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
154. %ourteen years a0o Dillia- put -oney in his account at %irst ational <an9. Dillia- decides to cash in his account and is told that his -oney has Cuadrupled. Accordin0 to the rule of 70, 1hat rate of interest did Alfred earnB a. 5 percent b. 7 percent c. 10 percent d. 14 percent A !" , A#" Analytic #+." 'ule of 70 $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
155. Jou are tearin0 do1n a buildin0 and find $1 in chan0e that so-eone lost 1hen 1or9in0 on the buildin0 140 years a0o. If, instead of bein0 careless 1ith the $1 in chan0e, this person had deposited it into a ban9 and earned & percent interest every year for 140 years, ho1 -uch 1ould be in the account today accordin0 to the rule of 70B a. $4 b. $8 c. $17 d. $3& A !" , A#" Analytic #+." 'ule of 70 $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
157. =sin0 the rule of 70, about ho1 -uch 1ould $100 be 1orth after 50 years if the interest rate 1ere 7 percentB a. $400 b. $800 c. $1,700 d. $3,&00 A !" $ A#" Analytic #+." 'ule of 70 $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
157. Accordin0 to the rule of 70, if a person>s savin0 doubles in 10 years, 1hat interest rate 1ere they earnin0B a. 3.5 b. 7 c. 14 d. one of the above is correct.
54

A !" < A#" Analytic #+." 'ule of 70
158. 'osie is ris9 averse and has $1,000 1ith 1hich to -a9e a financial invest-ent. !he has three options. +ption A is a ris9)free 0overn-ent bond that pays 5 percent interest each year for t1o years. +ption < is a lo1)ris9 stoc9 that analysts e2pect to be 1orth about $1,10&.50 in t1o years. +ption , is a hi0h)ris9 stoc9 that is e2pected to be 1orth about $1,&00 in four years. 'osie should choose a. option A. b. option <. c. option ,. d. either option A or option < because 'osie is indifferent bet1een those t1o options and they are superior to option ,. A !" A A#" Analytic #+." 'is9 aversion $I%" & '(%" &7)1 : &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
15;. If you put $1,000 in the ban9 today at an interest rate of 7O 1hat is its value in t1o yearsB a. $&,00041.076 b. $1,000 5 $41.076& c. $1,00041.076& d. one of the above are correct. A !" , A#" Analytic #+." %uture value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
170. #he future value of $500 saved for t1o years at an interest rate of 5O is a. $550.&5. b. $550.00. c. $551.&5. d. one of the above are correct. A !" , A#" Analytic #+." %uture value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
171. If you deposit $;00 into an account for t1o years and the interest rate is 4O, ho1 -uch do you have at the end of the t1o yearsB a. $;7&.00 b. $;73.44 c. $;74.1; d. one of the above is correct. A !" < A#" Analytic #+." %uture value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
17&. Dhich of the follo1in0 has the hi0hest future valueB a. $100 saved for & years at 10 percent interest b. $110 saved for & years at ; percent interest c. $1&0 saved for & years at 8 percent interest d. $130 saved for & years at 7 percent interest A !" $ A#" Analytic #+." %uture value $I%" & '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
55
173. +n the Internet you find the follo1in0 offers for openin0 an online account. Dhich of the- is the best offer if you have $&,000 to save for t1o yearsB a. an interest rate of 5 percent, 1ith the ban9 char0in0 you a $15 processin0 fee at the ti-e you open your account b. an interest rate of 3.5 percent, 1ith the ban9 0ivin0 you a $35 bonus to open your account c. an interest rate of 4 percent, 1ith the ban9 0ivin0 you a $&0 bonus at the ti-e you open your account d. an interest rate of 4.5 percent, 1ith no processin0 fee and no bonus A !" A A#" Analytic #+." %uture value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
174. +n the Internet you find the follo1in0 offers for openin0 an online account. Dhich of the- is the best offer if you have $5,000 to save for t1o yearsB a. an interest rate of 5 percent, 1ith the ban9 char0in0 you a $50 processin0 fee at the ti-e you open your account b. an interest rate of 4 percent, 1ith the ban9 0ivin0 you a $75 bonus at the ti-e you open your account c. an interest rate of 3.5 percent, 1ith the ban9 0ivin0 you a $100 bonus to open your account d. an interest rate of 4.5 percent, 1ith no processin0 fee and no bonus A !" < A#" Analytic #+." %uture value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
175. Dhat is the present value of a pay-ent of $1,000 t1o years fro- no1 if the interest rate is 7OB a. $&,00031.07 b. $1000341.076& c. $1000341 5 0.07&6 d. one of the above are correct. A !" < A#" Analytic #+." .resent value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
177. Dhat is the present value of a pay-ent of $&,000 to be received t1o years frotoday if the interest rate is 5OB a. $&&05 b. $&&00 c. $1818.18 d. $1814.07 A !" $ A#" Analytic #+." %uture value $I%" 1 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
177. Jou receive $500 today 1hich you plan to save for t1o years. Also, in t1o years you 1ill be 0iven another $500. If the interest rate is 5 percent, 1hat is the present value of the pay-ent of $500 today and the $500 in t1o yearsB a. $50041.056& 5 $500341.056& b. $50041.056& 5 $500 c. $500 5 $500341.056& d. $500 5 $500 A !" , A#" Analytic #+." .resent value $I%" 3 '(%" &7)1 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
178. Albert (instein once referred to compounding as a. Han obsession a-on0 econo-ists that defies e2planation.I b. Hthe 0reatest -athe-atical discovery of all ti-e.I c. his o1n discovery. d. Mohn /aynard Qeynes>s 0reatest contribution.
57
A !" < $I%" 1 '(%" &7)1 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." ,o-poundin0 /!," $efinitional
Sec 2 ! The Basic Tools of Finance ! "ana)in) Ris1. 'is9 aversion helps to e2plain various thin0s 1e observe in the econo-y, includin0 a. adherence to the old ada0e, H$on>t put all your e00s in one bas9et.I b. insurance. c. the ris9)return trade)off. d. All of the above are correct. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" $ A#" Analytic #+." 'is9 &.
(cono-ists have developed -odels of ris9 aversion usin0 the concept of a. utility and the associated assu-ption of di-inishin0 -ar0inal utility. b. utility and the associated assu-ption of increasin0 -ar0inal utility. c. inco-e and the associated assu-ption of di-inishin0 -ar0inal 1ealth. d. inco-e and the associated assu-ption of increasin0 -ar0inal 1ealth. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" A A#" Analytic #+." =tility : 'is9 3.
%or a ris9 averse person, a. the pleasure of 1innin0 $1,000 on a bet e2ceeds the pain of losin0 $1,000 on a bet. b. the pain of losin0 $1,000 on a bet e2ceeds the pleasure of 1innin0 $1,000 on a bet. c. the utility function e2hibits the property of increasin0 -ar0inal utility. d. the utility function 0ets steeper as 1ealth increases. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." =tility : 'is9
Fi)'re 27!%. #he fi0ure sho1s a utility function.
, < A
$400
$700
$800
Dealth
4.
Refer to Fi)'re 27!%. Dhat is -easured alon0 the vertical a2isB a. ris9 aversion b. -ar0inal utility c. utility d. the nu-ber of units of a 0ood that can be purchased

A !" , A#" Analytic /!," Interpretive 5. $I%" 1 '(%" &7)& *+," =tility and consu-er choice #+." =tility
57
Refer to Fi)'re 27!%. #he utility function that is sho1n e2hibits the property of di-inishin0 a. 1ealth. b. utility. c. -ar0inal 1ealth. d. -ar0inal utility. $I%" 1 '(%" &7)& *+," =tility and consu-er choice #+." /ar0inal utility
A !" $ A#" Analytic /!," Interpretive 7.
Refer to Fi)'re 27!%. Dhich distance alon0 the vertical a2is represents the -ar0inal utility of an increase in 1ealth fro- $700 to $800B a. the distance bet1een the ori0in and point < b. the distance bet1een the ori0in and point , c. the distance bet1een point A and point , d. the distance bet1een point < and point , $I%" & '(%" &7)& *+," =tility and consu-er choice #+." /ar0inal utility
Refer to Fi)'re 27!%. *et 0A represent the distance bet1een the ori0in and point AG let A< represent the distance bet1een point A and point <G etc. Dhich of the follo1in0 ratios best represents the -ar0inal utility per dollar 1hen 1ealth increases fro- $400 to $700B a. b. c. d.
A !" $ A#" Analytic /!," Analytical 8.
$I%" 3 '(%" &7)& *+," =tility and consu-er choice
#+."
/ar0inal utility
Refer to Fi)'re 27!%. %or the person to 1ho- this utility function applies, a. the -ore 1ealth she has, the less utility she 0ets fro- an additional dollar of 1ealth. b. the -ore 1ealth she has, the -ore utility she 0ets fro- an additional dollar of 1ealth. c. her level of satisfaction 1ill be enhanced -ore by an increase in 1ealth fro- $700 to $800 than it 1ould be by an increase in 1ealth fro- $400 to $700. d. her level of satisfaction 1ill be enhanced eCually by an increase in 1ealth fro- $700 to $800 or by an increase in 1ealth fro- $400 to $700. $I%" & '(%" &7)& *+," =tility and consu-er choice #+." /ar0inal utility
A !" A A#" Analytic /!," Interpretive ;.
Refer to Fi)'re 27!%. !uppose the person to 1ho- this utility function applies be0ins 1ith $700 in 1ealth. !tartin0 fro- there, a. she 1ould be 1illin0 to accept a coin)flip bet that 1ould result in her 1innin0 $&00 if the result 1as HheadsI or losin0 $&00 if the result 1as Htails.I b. the pain of losin0 $&00 of her 1ealth 1ould eCual the pleasure of addin0 $&00 to her 1ealth. c. the pain of losin0 $&00 of her 1ealth 1ould e2ceed the pleasure of addin0 $&00 to her 1ealth. d. the pleasure of addin0 $&00 to her 1ealth 1ould e2ceed the pain of losin0 $&00 of her 1ealth.
58

$I%" & '(%" &7)& *+," =tility and consu-er choice #+." /ar0inal utility : 'is9
A !" , A#" Analytic /!," Interpretive 10.
Refer to Fi)'re 27!%. #he properties e2hibited by this utility function help to e2plain various thin0s 1e observe in the econo-y, includin0 a. the ris9)return tradeoff. b. insurance. c. diversification. d. All of the above are correct. $I%" 1 '(%" &7)& *+," =tility and consu-er choice #+." =tility : 'is9
%ro- the standpoint of the econo-y as a 1hole, the role of insurance is a. to entice ris9)lovin0 people to beco-e ris9 averse. b. to pro-ote the pheno-enon of adverse selection. c. not to eli-inate the ris9s inherent in life, but to spread the- around -ore efficiently. d. not to spread ris9s, but to eli-inate the- for individual policy holders. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" , A#" Analytic #+." Insurance 1&.
#he proble- of moral hazard arises because a. life is full of all sorts of ris9s. b. after people buy insurance, they have less incentive to be careful about their ris9y behavior. c. a hi0h)ris9 person is -ore li9ely to apply for insurance than is a lo1)ris9 person. d. insurance co-panies 0o to 0reat effort to avoid payin0 clai-s to their policy holders. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." /oral haFard 13.
As the nu-ber of stoc9s in a person>s portfolio increases, a. the ris9 of the portfolio increases, as indicated by the increasin0 value of the standard deviation of the portfolio. b. the ris9 of the portfolio increases, as indicated by the decreasin0 value of the standard deviation of the portfolio. c. the ris9 of the portfolio decreases, as indicated by the increasin0 value of the standard deviation of the portfolio. d. the ris9 of the portfolio decreases, as indicated by the decreasin0 value of the standard deviation of the portfolio.
A !" $ $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Interpretive 14. #he lar0est reduction in a portfolio>s ris9 is achieved 1hen the nu-ber of stoc9s in the portfolio is increased froa. 80 to 100. b. 40 to 80. c. 10 to &0. d. 1 to 10.
A !" $ $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Interpretive

15. $iversification of a portfolio a. can eli-inate -ar9et ris9, but it cannot eli-inate fir-)specific ris9. b. can eli-inate fir-)specific ris9, but it cannot eli-inate -ar9et ris9. c. increases the portfolio>s standard deviation. d. is not necessary for a person 1ho is ris9 averse.
5;
A !" < $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Interpretive Fi)'re 27!2. On the )raph, x represents ris- an/ y represents ret'rn.
10 ! ; 8 7 7 5 4 A 3 & 1
$ , <
5
17.
10
15
&0
Refer to Fi)'re 27!2. .oint A represents a situation in 1hich a. all of a person>s savin0s are allocated to a class of safe assets. b. the person 9no1s 1ith certainty that his or her return 1ill be 3 percent. c. the standard deviation of the person>s portfolio is Fero. d. All of the above are correct. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" $ A#" Analytic #+." 'is9 : 'eturn 17.
Refer to Fi)'re 27!2. Dhich of the follo1in0 state-ents is correctB a. At point A the standard deviation of the portfolio is 3. b. A ris9 averse person al1ays 1ill choose to be at point A. c. At point $ the portfolio consists of about 15 percent stoc9s and 85 percent safe assets. d. #he fi0ure sho1s that the 0reater the ris9, the 0reater the return. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
'obert is ris9 averse and has $1,000 1ith 1hich to -a9e a financial invest-ent. ?e has three options. +ption A is a ris9)free 0overn-ent bond that pays 5 percent interest each year for t1o years. +ption < is a lo1)ris9 stoc9 that analysts e2pect to be 1orth about $1,10&.50 in t1o years. +ption , is a hi0h)ris9 stoc9 that is e2pected to be 1orth about $1,&00 in four years. 'obert should choose a. option A. b. option <. c. option ,. d. either A or < because they are the sa-e to hi-. $I%" & '(%" &7)1 : &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Analytical
A !" A A#" Analytic #+." 'is9
70
1;.

A -easure of the volatility of a variable is its a. present value. b. future value. c. return. d. standard deviation.
A !" $ $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." !tandard deviation /!," $efinitional &0. A ris9)averse person a. has a utility curve 1here the slope increases 1ith 1ealth, and -i0ht ta9e a bet 1ith a 70 percent chance of 1inin0 $100 and a 40 per chance of losin0 $100. b. has a utility curve 1here the slope increases 1ith 1ealth, and 1ould never ta9e a bet 1ith a 70 percent chance of 1inin0 $100 and a 40 per cent chance of losin0 $100. c. has a utility curve 1here the slope decreases 1ith 1ealth, and -i0ht ta9e a bet 1ith a 70 percent chance of 1inin0 $100 and a 40 per chance of losin0 $100. d. has a utility curve 1here the slope decreases 1ith 1ealth, and 1ould never ta9e a bet 1ith a 70 percent chance of 1inin0 $100 and a 40 per cent chance of losin0 $100. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" , A#" Analytic #+." 'is9 : =tility &1.
If a person is ris9 averse, then she has a. di-inishin0 -ar0inal utility of 1ealth, i-plyin0 that her utility function 0ets flatter as 1ealth increases. b. di-inishin0 -ar0inal utility of 1ealth, i-plyin0 that her utility function 0ets steeper as 1ealth increases. c. increasin0 -ar0inal utility of 1ealth, i-plyin0 that her utility function 0ets flatter as 1ealth increases. d. increasin0 -ar0inal utility of 1ealth, i-plyin0 that her utility function 0ets steeper as 1ealth increases. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" A A#" Analytic #+." 'is9 : =tility &&.
If Mulieanne is ris9)averse, then she 1ill al1ays a. choose not to play a 0a-e 1here she has a 50 percent chance of 1innin0 $1 and a 50 percent chance of losin0 $1. b. choose not to play a 0a-e 1here she has a 75 percent chance of 1innin0 $1 and a &5 percent chance of losin0 $1. c. choose to play a 0a-e 1here she has a 5& percent chance of 1innin0 $1 and a 48 percent chance of losin0 $1. d. All of the above are correct. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" A A#" Analytic #+." 'is9 &3.
In 1hich of the follo1in0 0a-es is it conceivable that a ris9)averse person -i0ht be 1illin0 to playB a. a 0a-e 1here she has a 50 percent chance of 1innin0 $1 and a 50 percent chance of losin0 $1 b. a 0a-e 1here she has a 50 percent chance of 1innin0 $100 and a 50 percent chance of losin0 $100 c. a 0a-e 1here she has a 70 percent chance of 1innin0 $1 and a 40 percent chance of losin0 $1 d. a 0a-e 1here she has a 40 percent chance of 1innin0 $1 and a 70 percent chance of losin0 $1 $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" , A#" Analytic #+." 'is9

&4. In 1hich of the follo1in0 0a-es is it conceivable that a ris9)averse person -i0ht be 1illin0 to playB a. a 0a-e 1here she has a 70 percent chance of 1innin0 $1 and a 30 percent chance of losin0 $1 b. a 0a-e 1here she has a 70 percent chance of 1innin0 $100 and a 40 percent chance of losin0 $100 c. a 0a-e 1here she has a 70 percent chance of 1innin0 $& and a 40 percent chance of losin0 $1 d. All of the above are correct. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
71
A !" $ A#" Analytic #+." 'is9 &5.
Dhich of the follo1in0 is correct concernin0 a ris9)averse personB a. !he 1ould not play 0a-es 1here the probability of 1innin0 and losin0 a dollar are the sa-e. b. !he -i0ht not buy health insurance if she thin9s her ris9s are lo1. c. ?er -ar0inal utility of 1ealth decreases as her inco-e increases. d. All of the above are correct. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" $ A#" Analytic #+." 'is9 &7.
#a-ar is ris9 averse. Dhich of the follo1in0 is correct about #a-arB a. ?er -ar0inal utility of 1ealth increases as her inco-e increases. b. !he 1ill al1ays accept a bet if the probability of 1innin0 a dollar is the sa-e as the probability of losin0 a dollar. c. ?er utility function is a strai0ht line. d. one of the above are correct. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" $ A#" Analytic #+." 'is9 &7.
#he utility function of a ris9)averse person has a a. positive slope and 0ets steeper as 1ealth increases. b. positive slope but 0ets flatter as 1ealth increases. c. ne0ative slope but 0ets steeper as 1ealth increases. d. ne0ative slope and 0ets flatter as 1ealth increases. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" < A#" Analytic #+." 'is9 : =tility &8.
A ris9)averse person has a. utility and -ar0inal utility curves that slope up1ard. b. utility and -ar0inal utility curves that slope do1n1ard. c. a utility curve that slopes do1n and a -ar0inal utility curve that slopes up1ard. d. a utility curve that slopes up1ard and a -ar0inal utility curve that slopes do1n1ard. $I%" 3 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" $ A#" Analytic #+." 'is9 : =tility &;.
$i-inishin0 -ar0inal utility of 1ealth i-plies that the utility function is a. up1ard)slopin0 and has decreasin0 slope. b. up1ard)slopin0 and has increasin0 slope. c. do1n1ard)slopin0 and has decreasin0 slope. d. do1n1ard)slopin0 and has increasin0 slope. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" A A#" Analytic #+." 'is9 : =tility
7&
30.

If a person is ris9 averse, then as 1ealth increases, total utility of 1ealth a. increases at an increasin0 rate. b. increases at a decreasin0 rate. c. decreases at an increasin0 rate. d. decreases at a decreasin0 rate. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" < A#" Analytic #+." 'is9 : =tility 31.
Eiven that Isabella is a ris9)averse person, she -i0ht accept a bet 1ith a 50 percent chance of losin0 $100 today if she had a 50 percent a. chance of 1innin0 $1&0 in t1o years and the interest rate 1as 11O. b. chance of 1innin0 $114 in t1o years and the interest rate 1as 7O. c. chance of 1innin0 $110 in t1o years and the interest rate 1as 3O. d. one of the above are correctG a ris9 averse person 1ould not accept any of the above bets.
A !" , $I%" 3 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : 'is9 /!," Analytical 3&. 'is9 a. can be reduced by placin0 a lar0e nu-ber of s-all bets rather than a s-all nu-ber of lar0e bets. b. can be reduced by increasin0 the nu-ber of stoc9s in a portfolio. c. <oth A and < are correct. d. either A nor < are correct. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" , A#" Analytic #+." 'is9 33.
#he last $&,000 of 'olanda@s 1ealth adds less to her utility than the previous $&,000. <ased on this infor-ation, 'olanda has a. increasin0 -ar0inal utility of 1ealth and is ris9 averse. b. increasin0 -ar0inal utility of 1ealth and is not ris9 averse. c. decreasin0 -ar0inal utility of 1ealth and is ris9 averse. d. decreasin0 -ar0inal utility of 1ealth and is not ris9 averse. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" , A#" Analytic #+." 'is9 : =tility 34.
#he last $&00 of #a-i@s 1ealth added -ore to her utility than another $&00 1ould. <ased on this infor-ation, #a-i@s utility function a. and -ar0inal utility function are both up1ard slopin0. b. and -ar0inal utility function are both do1n1ard slopin0. c. is up1ard slopin0 and her -ar0inal utility function is do1n1ard slopin0. d. is do1n1ard slopin0 and her -ar0inal utility function is up1ard slopin0. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" , A#" Analytic #+." 'is9 : =tility 35.
!uppose that #ho- e2periences a 0reater loss in utility if he loses $50 than he 1ould 0ain in utility if he 1ins $50. #his i-plies that #ho->s a. -ar0inal utility di-inishes as 1ealth rises, so he -ust be ris9 averse. b. -ar0inal utility di-inishes as 1ealth rises, but 1e can>t tell fro- this if he is ris9 averse. c. -ar0inal utility increases as 1ealth rises, so he -ust be ris9 averse. d. -ar0inal utility increases as 1ealth rises, but 1e can>t tell fro- this if he is ris9 averse. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive

37. Dhich of the follo1in0 defines an annuityB a. %or a fee, an insurance co-pany provides you 1ith re0ular inco-e until you die. b. A surchar0e is added to life)insurance pre-iu-s paid by persons in dan0erous occupations. c. Annuity is another na-e for stoc9 funds -ana0ed by -utual fund -ana0ers. d. Annuity is another na-e for any diversified portfolio. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
73
A !" A A#" Analytic #+." Annuity 37.
In effect, an annuit! provides insurance a. a0ainst the ris9 of dyin0 and leavin0 one>s fa-ily 1ithout a re0ular inco-e. b. a0ainst the ris9 of livin0 too lon0. c. to people 1ho are not ris9)averse. d. to people 1hose utility functions do not display the usual properties. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." Annuities 38.
Dhich of the follo1in0 actions best illustrates adverse selectionB a. A person adds ris9y stoc9 to his portfolio. b. A person 1ho has narro1ly avoided -any accidents applies for auto-obile insurance. c. A person is un1illin0 to buy a stoc9 1hen she believes its price has an eCual chance of risin0 or fallin0 $10. d. A person purchases ho-eo1ners insurance and then chec9s his s-o9e detector batteries less freCuently.
A !" < $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection : /oral haFard /!," Interpretive 3;. Dhich of the follo1in0 actions best illustrates -oral haFardB a. A person adds ris9y stoc9 to his portfolio. b. A person 1ho has narro1ly avoided -any accidents applies for auto-obile insurance. c. A person is un1illin0 to buy a stoc9 1hen she believes its price has an eCual chance of risin0 or fallin0 $10. d. A person purchases ho-eo1ners insurance and then chec9s his s-o9e detector batteries less freCuently.
A !" $ $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection : /oral haFard /!," Interpretive 40. Annie 9no1s that people in her fa-ily die youn0, and so she buys life insurance. ?arry 9no1s he is a rec9less driver and so he applies for auto-obile insurance. a. #hese are both e2a-ples of adverse selection. b. #hese are both e2a-ples of -oral haFard. c. #he first e2a-ple illustrates adverse selection, and the second illustrates -oral haFard. d. #he first e2a-ple illustrates -oral haFard, and the second illustrates adverse selection.
A !" A $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection : /oral haFard /!," Interpretive 41. !ally buys health insurance because she 9no1s that she has health ris9s that 1ouldn>t be obvious to an insurance co-pany. (d1ard buys ho-e o1ners insurance and then is less careful to -a9e sure he>s put out his ci0arettes. #he e2a-ple 1ith !ally a. and the e2a-ple 1ith (d1ard illustrate adverse selection. b. and the e2a-ple 1ith !ally illustrate -oral haFard. c. illustrates adverse selectionG the e2a-ple 1ith (d1ard illustrates -oral haFard. d. illustrates -oral haFardG the e2a-ple 1ith (d1ard illustrates adverse selection.
74
A !" , $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection : /oral haFard /!," Interpretive 4&. Dhich of the follo1in0 is adverse selectionB a. the ris9 associated 1ith selectin0 stoc9s in only a fe1 specific co-panies b. the ris9 that a person 1ill beco-e overconfident in his ability to select stoc9s c. a hi0h)ris9 person bein0 -ore li9ely to apply for insurance d. after obtainin0 insurance a person havin0 less incentive to be careful
A !" , $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection /!," Interpretive 43. Dhich of the follo1in0 best illustrates -oral haFardB a. After a person obtains life insurance, she ta9es up s9ydivin0. b. A person obtains insurance 9no1in0 he is in poor health. c. A person holds stoc9 only in very ris9y corporations. d. A person holds stoc9s fro- only a fe1 corporations. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" A A#" Analytic #+." /oral haFard 44.
Dhen you rent a car, you -i0ht treat it 1ith less care than you 1ould if it 1ere your o1n. #his is an e2a-ple of a. -ar9et ris9. b. -oral haFard. c. adverse selection. d. ris9 aversion. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." /oral haFard 45.
%inancial inter-ediaries typically reCuire -ort0a0e borro1ers to have ho-eo1ner@s insurance and do credit chec9s before -a9in0 the loan. a. #he insurance reCuire-ent and the credit chec9 are both desi0ned pri-arily to reduce adverse selection. b. #he insurance reCuire-ent and the credit chec9 are both desi0ned pri-arily to reduce the ris9 of -oral haFard. c. #he insurance reCuire-ent is desi0ned pri-arily to reduce adverse selectionG the credit chec9 is desi0ned pri-arily to reduce the ris9 of -oral haFard. d. #he insurance reCuire-ent is desi0ned pri-arily to reduce the ris9 of -oral haFardG the credit chec9 is desi0ned pri-arily to reduce adverse selection.
A !" $ $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection : /oral haFard /!," Interpretive 47. Jou -ay be un1illin0 to buy a used car because you suspect the last o1ner found out the car 1as a le-on. Jou -ay treat a car you rented 1ith a little less care than you@d use on your o1n car. a. <oth e2a-ples pri-arily illustrate adverse selection. b. <oth e2a-ples pri-arily illustrate -oral haFard. c. #he first e2a-ple pri-arily illustrates adverse selectionG the second pri-arily illustrates -oral haFard. d. #he first e2a-ple pri-arily illustrates -oral haFardG the second pri-arily illustrates adverse selection.
A !" , $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse selection : /oral haFard /!," Interpretive

47. +ver the past t1o centuries, the avera0e annual rates of return 1ere about a. 5 percent for stoc9s and about 1.5 percent for short)ter- 0overn-ent bonds. b. 7 percent for stoc9s and about &.5 percent for short)ter- 0overn-ent bonds. c. 8 percent for stoc9s and about 3 percent for short)ter- 0overn-ent bonds. d. one of the above is correct. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
75
A !" , A#" Analytic #+." 'eturns 48.
'is9)averse people 1ill choose different asset portfolios than people 1ho are not ris9 averse. +ver a lon0 period of ti-e, 1e 1ould e2pect that a. every ris9)averse person 1ill earn a hi0her rate of return than every non)ris9 averse person. b. every ris9)averse person 1ill earn a lo1er rate of return than every non)ris9 averse person. c. the avera0e ris9)averse person 1ill earn a hi0her rate of return than the avera0e non)ris9 averse person. d. the avera0e ris9)averse person 1ill earn a lo1er rate of return than the avera0e non)ris9 averse person.
A !" $ $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : 'is9 /!," Interpretive 4;. Dhich of the follo1in0 is not correctB a. #he hi0her avera0e return on stoc9s than on bonds co-es at the price of hi0her ris9. b. 'is9)averse persons 1ill ta9e the ris9s involved in holdin0 stoc9s if the avera0e return is hi0h enou0h to co-pensate for the ris9. c. Insurance -ar9ets reduce ris9, but not by diversification. d. 'is9 can be reduced by placin0 a lar0e nu-ber of s-all bets, rather than a s-all nu-ber of lar0e bets. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" , A#" Analytic #+." 'is9 50.
'o0er deter-ines that if Ai- ,orporation has hi0h revenues, then Rest ,orporation 1ill have lo1 revenues, and that if Ai- ,orporation has lo1 revenues, Rest ,orporation 1ill have hi0h revenues. ?e buys stoc9 in both corporations. a. ?e has reduced fir-)specific ris9 but not -ar9et ris9. b. ?e has reduced -ar9et ris9, but not fir-)specific ris9. c. ?e had reduce both fir-)specific ris9 and -ar9et ris9. d. ?e has reduced neither fir-)specific ris9 nor -ar9et ris9. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" A A#" Analytic #+." 'is9 51.
A-anda tal9s 1ith several different bro9ers at a social 0atherin0. !he hears the follo1in0 advice fro- bro9ers A, <, and ,. Dhich bro9er, if any, 0ave her incorrect adviceB a. <ro9er A" H#here are ris9s in holdin0 stoc9s, even in a hi0hly diversified portfolio.I b. <ro9er <" H.ortfolios 1ith s-aller standard deviations have lo1er ris9.I c. <ro9er ," H!toc9s 1ith 0reater ris9s offer lo1er avera0e returns.I d. #hey all 0ave her correct advice. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" , A#" Analytic #+." 'is9
77
5&.

/ary tal9ed to several stoc9bro9ers and -ade the follo1in0 conclusions. Dhich, if any, of her conclusions are correctB a. It is relatively easy to reduce fir-)specific ris9 by increasin0 the nu-ber of co-panies one holds stoc9 in. b. !toc9 prices, even if not e2actly a rando- 1al9, are very close to it. c. !o-e people have -ade a lot of -oney in the stoc9 -ar9et by usin0 insider infor-ation, but these cases are not contrary to the efficient -ar9ets hypothesis. d. All of /ary>s conclusions are correct. $I%" 3 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" $ A#" Analytic #+." !toc9 53.
+ther thin0s the sa-e, as the nu-ber of stoc9s in a portfolio rises, a. ris9 increases and the standard deviation of the return rises. b. ris9 increases and the standard deviation of the return falls. c. ris9 decreases and the standard deviation of the return rises. d. ris9 decreases and the standard deviation of the return falls. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" $ A#" Analytic #+." 'is9 54.
+ther thin0s the sa-e, as the stoc9s of a 0reater nu-ber of corporations are held in a portfolio, a. ris9 increases at an increasin0 rate. b. ris9 increases at a decreasin0 rate. c. ris9 decreases at an increasin0 rate. d. ris9 decreases at a decreasin0 rate. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" $ A#" Analytic #+." 'is9 55.
$iversification reduces a. only -ar9et ris9. b. only fir-)specific ris9. c. neither -ar9et or fir-)specific ris9. d. both -ar9et and fir-)specific ris9. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" < A#" Analytic #+." 'is9 57.
Dhich of the follo1in0 is a source of -ar9et ris9B a. ?oldin0 stoc9s in -any co-panies carries the ris9 of a reduced avera0e return. b. 'eal E$. varies over ti-e and sales and profits -ove 1ith real E$.. c. Dhen a paper producer has declinin0 sales, it is li9ely that so 1ill other paper producers. d. If stoc9holders beco-e a00ravated 1ith the 1ay a ,(+ runs a co-pany, the price of that co-pany>s stoc9 -i0ht fall in the stoc9 -ar9et.. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." 'is9 57.
#here are -any concerns for ris9)averse lenders. ,onsider the follo1in0" 1. *enders are concerned that borro1ers 1ith the 0reatest ris9 are the ones -ost li9ely to actively pursue loans. &. *enders are concerned that real E$. 1ill decline leadin0 to reduced corporate profits. 3. *enders are concerned that products produced by certain corporations 1ill beco-e obsolete. a. 1 is -ar9et ris9G & is fir-)specific ris9 b. & is -ar9et ris9G 3 is fir-)specific ris9 c. 3 is -ar9et ris9G 1 is fir-)specific ris9 d. & is fir-)specific ris9G 3 is -ar9et ris9

A !" < A#" Analytic #+." 'is9 58. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
77
Dhich of the follo1in0 is not correctB a. A ris9 averse person -i0ht be 1illin0 to hold stoc9s. b. +ther thin0s the sa-e, a portfolio 1ith the stoc9s of a lar0e nu-ber of co-panies has less ris9. c. +ther thin0s the sa-e, the lar0er a portion of savin0s a person invests in stoc9s, the 0reater his e2pected return. d. $iversification can eli-inate -ar9et ris9 but not fir-)specific ris9.
A !" $ $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," $efinitional 5;. An increase in the nu-ber of corporations in a portfolio fro- 1 to 10 reduces a. -ar9et ris9 by -ore than an increase fro- 110 to 1&0. b. -ar9et ris9 by less than an increase fro- 110 to 1&0. c. fir-)specific ris9 by -ore than an increase fro- 110 to 1&0. d. fir-)specific ris9 by less than an increase fro- 110 to 1&0.
A !" , $I%" 3 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Interpretive 70. An increase in the nu-ber of corporations in a portfolio fro- 110 to 1&0 reduces a. -ar9et ris9 by -ore than an increase fro- 1 to 10. b. -ar9et ris9 by less than an increase fro- 1 to 10. c. fir-)specific ris9 by -ore than an increase fro- 1 to 10. d. fir-)specific ris9 by less than an increase fro- 1 to 10.
A !" $ $I%" 3 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Interpretive 71. An0ela reads financial advice colu-ns and concludes the follo1in0. Dhich, if any, of her conclusions are incorrectB a. ?i0her avera0e returns co-e at the price of hi0her ris9. b. .eople 1ho are ris9 averse should never hold stoc9. c. $iversification cannot eli-inate all of the ris9 in stoc9 portfolio. d. one of her conclusions are incorrect. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." !toc9 7&.
<en decided to increase the nu-ber of stoc9s in his portfolio. In doin0 so, <en reduced a. both the fir-)specific ris9 and the -ar9et ris9 of his portfolio. b. the fir-)specific ris9, but not the -ar9et ris9 of his portfolio. c. the -ar9et ris9, but not the fir-)specific ris9 of his portfolio. d. neither the -ar9et ris9 nor the fir-)specific ris9 of his portfolio. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." 'is9 73.
$avid increases the nu-ber of co-panies in 1hich he holds stoc9s. a. #his reduces ris9@s standard deviation and fir-)specific ris9. b. #his reduces ris9@s standard deviation and -ar9et ris9. c. #his raises -ar9et ris9, but lo1ers fir-)specific ris9. Dhat happens to overall ris9 is unclear. d. #his raises fir-)specific ris9, but lo1ers -ar9et ris9. Dhat happens to overall ris9 is unclear. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
78
74.

.hillip is a -ort0a0e bro9er, 1ho is paid by co--ission. Dhen interest rates decline, he does a lot of business and earns a lot of -oney, as -ore people buy houses or refinance their -ort0a0es. <ut 1hen interest rates rise, business falls substantially. #o diversify, .hillip should choose invest-ents that a. provide a hi0her return than the -ar9et avera0e. b. provide a lo1er return than the -ar9et avera0e. c. pay hi0her returns 1hen interest rates rise and lo1er returns 1hen interest rates fall. d. pay lo1er returns 1hen interest rates rise and hi0her returns 1hen interest rates fall.
A !" , $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Applicative 75. #o diversify, a ho-eo1ner 1ith a variable)rate -ort0a0e should choose invest-ents that a. pay hi0her returns 1hen interest rates rise and lo1er returns 1hen interest rates fall. b. pay lo1er returns 1hen interest rates rise and hi0her returns 1hen interest rates fall. c. provide a hi0her return than the -ar9et avera0e. d. provide a lo1er return than the -ar9et avera0e.
A !" A $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Analytical 77. $a9ota rearran0es her portfolio so that it has a hi0her avera0e return. In doin0 this rearran0in0, she a. raised both fir-)specific ris9 and -ar9et ris9. b. raised fir-)specific ris9, but not -ar9et ris9. c. raised -ar9et ris9, but not fir-)specific ris9. d. one of the above is correct. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." 'is9 77.
/arcus puts a 0reater proportion of his portfolio into 0overn-ent bonds. /arcus>s action a. increases both ris9 and the avera0e rate of return. b. decreases both ris9 and the avera0e rate of return. c. increases ris9, but decreases the avera0e rate of return. d. decreases ris9, but increases the avera0e rate of return. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" < A#" Analytic #+." 'is9 78.
/anufacturers of Dei0htbe0one are concerned that 0enetic advances in 1ei0ht control -i0ht reduce the de-and for their diet snac9s. #his is an e2a-ple of a. fir-)specific ris9, 1hich 1ill li9ely raise shareholders> de-and for hi0her return. b. fir-)specific ris9, 1hich 1ill li9ely not li9ely raise shareholders> de-and for hi0her return. c. -ar9et ris9, 1hich 1ill li9ely raise shareholders> de-and for hi0her return. d. -ar9et ris9, 1hich 1ill li9ely not raise shareholders> de-and for hi0her return. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Applicative
A !" A A#" Analytic #+." 'is9 7;.
!uppose that funda-ental analysis indicates a particular co-pany>s stoc9 is overvalued. a. #his -eans its present value is less than its price. Jou should consider addin0 the stoc9 to your portfolio. b. #his -eans its present value is less than its price. Jou shouldn>t consider addin0 the stoc9 to your portfolio. c. #his -eans its present value is -ore than its price. Jou should consider addin0 the stoc9 to your portfolio. d. #his -eans its present value is -ore than its price. Jou shouldn>t consider addin0 the stoc9 to your portfolio.

A !" < $I%" 1 '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," $efinitional 70. A ris9)averse person has a. a utility function 1hose slope 0ets flatter as 1ealth rises. #his -eans they have increasin0 -ar0inal utility of 1ealth. b. a utility function 1hose slope 0ets flatter as 1ealth rises. #his -eans they have di-inishin0 -ar0inal utility of 1ealth. c. a utility function 1hose slope 0ets steeper as 1ealth rises. #his -eans they have increasin0 -ar0inal utility of 1ealth. d. a utility function 1hose slope 0ets steeper as 1ealth rises. #his -eans they have di-inishin0 utility of 1ealth. $I%" 1 '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
7;
A !" < A#" Analytic #+." 'is9 71.
#he idea of insurance a. 1ould not appeal to a ris9)averse person. b. is, other thin0s the sa-e, to reduce the probability of a fire, accident, or death. c. is to share ris9. d. is to provide a sure thin0, not a 0a-ble.
A !" , $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Insurance : 'is9 /!," Interpretive 7&. Dhich of the follo1in0 actions best illustrates adverse selectionB a. A person purposely chooses bonds of corporations 1ith hi0h default ris9 because of the hi0h returns. b. A person disli9es losin0 $400 -ore than he li9es 1innin0 $400. c. After obtainin0 auto-obile insurance a person drives less carefully than before. d. A person intendin0 to ta9e up dan0erous hobbies applies for life insurance.
A !" $ $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Adverse !election /!," Interpretive 73. Dhich of the follo1in0 best illustrates diversificationB a. A co-pany that produces -any different products decides to produce fe1er. b. After sellin0 stoc9, corporate -ana0e-ent spends funds on pro8ects 1ith 0reater ris9s than shareholders had anticipated. c. Instead of holdin0 only the stoc9s of co-panies en0a0ed in the ban9in0 business, a person decides to hold stoc9 in a nu-ber of different co-panies producin0 different 0oods and services. d. A person decides to purchase only stoc9s that have paid hi0h dividends in the past.
A !" , $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," Interpretive 74. As the nu-ber of stoc9s in a portfolio rises, a. both fir-)specific ris9s and -ar9et ris9 fall. b. fir-)specific ris9s fallG -ar9et ris9 does not. c. -ar9et ris9 fallsG fir-)specific ris9s do not. d. neither fir-)specific ris9s nor -ar9et ris9 falls.
A !" < $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'is9 : $iversification /!," Interpretive
70
75.

In 0eneral, as a person includes fe1er stoc9s and -ore bonds in his portfolio, a. both ris9 and e2pected return rise. b. ris9 rises but e2pected return falls. c. ris9 falls, but e2pected return rises. d. both ris9 and e2pected return fall. $I%" & '(%" &7)& *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
Accordin0 to funda-ental analysis, a saver should prefer to buy stoc9s that are a. undervalued. #his -eans the price of the stoc9 is lo1 0iven the value of the corporation. b. undervalued. #his -eans the value of the corporation is lo1 0iven the price of stoc9. c. overvalued. #his -eans the price of the stoc9 is hi0h 0iven the value of the corporation. d. overvalued. #his -eans the value of the corporation is hi0h 0iven the price of stoc9.
A !" A $I%" & '(%" &7)& A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," $efinitional
Sec 0 ! The Basic Tools of Finance ! Asset &al'ation

"ULT#$LE CHO#CE 1. Dhen a person en0a0es in detailed analysis of a co-pany to deter-ine its value, he or she is en0a0in0 in a. standard deviation analysis. b. infor-ational analysis. c. funda-ental analysis. d. efficiency analysis.
A !" , $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," $efinitional &. <y purchasin0 shares in a -utual fund that holds a portfolio of stoc9s, a person can a. benefit fro- funda-ental analysis, since the -utual fund reCuires its shareholders to perforfunda-ental analysis on their o1n. b. benefit fro- funda-ental analysis, since the -utual fund hires one or -ore individuals to perforfunda-ental analysis for the fund. c. eli-inate -ar9et ris9. d. reduce the standard deviation of his or her portfolio to Fero.
A !" < $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," $efinitional 3. If the e""icient markets h!pothesis is correct, then a. the nu-ber of shares of stoc9 offered for sale e2ceeds the nu-ber of shares of stoc9 that people 1ant to buy. b. the stoc9 -ar9et is infor-ationally efficient. c. stoc9 prices never follo1 a rando- 1al9. d. All of the above are correct.
A !" < $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," Interpretive 4. If you believe that stoc9 prices follo1 a rando- 1al9, then probably you a. do not believe that there is positive relationship bet1een ris9 and return. b. do not believe that stoc9 prices reflect all available infor-ation. c. believe in the validity of the efficient -ar9ets hypothesis. d. believe that it is a 0ood idea to en0a0e in funda-ental analysis.

A !" , $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'ando- 1al9 : (fficient -ar9ets hypothesis /!," Interpretive 5. #he perfor-ance of inde2 funds a. is seldo-, if ever, superior to the perfor-ance of actively)-ana0ed funds. b. provides evidence in support of the notion that stoc9 prices do not depend upon supply and de-and. c. provides evidence in support of the efficient -ar9ets hypothesis. d. provides evidence in support of the notion that stoc9)-ar9et participants are irrational. $I%" & '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
71
A !" , A#" Analytic #+." Inde2 funds 7.
Dhich of the follo1in0 is correct concernin0 diversificationB a. It only reduces fir-)specific ris9, but -ost of the reduction co-es fro- increasin0 the nu-ber of stoc9s in a portfolio to 1ell above 30. b. It only reduces fir-)specific ris9G -uch of the reduction co-es fro- increasin0 the nu-ber of stoc9s in a portfolio fro- 1 to 30. c. It only reduces -ar9et ris9, but -ost of the reduction co-es fro- increasin0 the nu-ber of stoc9s in a portfolio to 1ell above 30. d. one of the above is correct.
A !" < $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification : 'is9 /!," Interpretive 7. Dhich of the follo1in0 is correctB a. 'is9)averse people 1ill not hold stoc9. b. $iversification cannot reduce fir-)specific ris9. c. #he lar0er the percenta0e of stoc9 in a portfolio, the 0reater the ris9, but the 0reater the avera0e return. d. !toc9 prices are deter-ined by funda-ental analysis rather than by supply and de-and. $I%" 1 '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" , A#" Analytic #+." 'is9 8.
$ividends a. are the rates of return on -utual funds. b. are cash pay-ents that co-panies -a9e to shareholders. c. are the difference bet1een the price and present value per share of a stoc9. d. are the rates of return on a co-pany>s capital stoc9. $I%" 1 '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" < A#" Analytic #+." $ividends ;.
A hi0h ran9in0 corporate official of a 1ell)9no1n co-pany is une2pectedly sentenced to prison for cri-inal activity in tradin0 stoc9s. #his should a. raise the price and raise the present value of the corporation>s stoc9. b. raise the price and lo1er the present value of the corporation>s stoc9. c. lo1er the price and raise the present value of the corporation>s stoc9. d. lo1er the price and lo1er the present value of the corporation>s stoc9.
A !" $ $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," Applicative
7&
10.

%unda-ental analysis is a. the study of the relation bet1een ris9 and return of stoc9 portfolios. b. the deter-ination of the allocation of savin0s bet1een stoc9s and bonds based on a person>s de0ree of ris9 aversion. c. the study of a co-pany>s accountin0 state-ents and future prospects to deter-ine its value. d. a -ethod used to deter-ine ho1 addin0 stoc9s to a portfolio 1ill chan0e the ris9 of the portfolio.
A !" , $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," $efinitional 11. %unda-ental analysis sho1s that stoc9 in Dallace (lectronics ,orporation has a present value that is hi0her than its price. a. #his stoc9 is overvaluedG you should consider addin0 it to your portfolio. b. #his stoc9 is overvaluedG you shouldn@t consider addin0 it to your portfolio. c. #his stoc9 is undervaluedG you should consider addin0 it to your portfolio. d. #his stoc9 is undervaluedG you shouldn@t consider addin0 it to your portfolio.
A !" , $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," Applicative 1&. %unda-ental analysis sho1s that stoc9 in %aceItS ,os-etics ,orporation has a present value that is hi0her than its price. a. #his stoc9 is overvaluedG you should consider addin0 it to your portfolio. b. #his stoc9 is overvaluedG you shouldn@t consider addin0 it to your portfolio. c. #his stoc9 is undervaluedG you should consider addin0 it to your portfolio. d. #his stoc9 is undervaluedG you shouldn@t consider addin0 it to your portfolio.
A !" , $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," Applicative 13. %unda-ental analysis sho1s that stoc9 in ,edar Nalley %urniture ,orporation has a price that e2ceeds its present value. a. #his stoc9 is overvaluedG you should consider addin0 it to your portfolio. b. #his stoc9 is overvaluedG you shouldn@t consider addin0 it to your portfolio. c. #his stoc9 is undervaluedG you should consider addin0 it to your portfolio. d. #his stoc9 is undervaluedG you shouldn@t consider addin0 it to your portfolio.
A !" < $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," Applicative 14. %unda-ental analysis sho1s that stoc9 in *od0efire 'estaurants has a present value belo1 its price. a. #his stoc9 is overvaluedG you should consider addin0 it to your portfolio. b. #his stoc9 is overvaluedG you shouldn@t consider addin0 it to your portfolio. c. #his stoc9 is undervaluedG you should consider addin0 it to your portfolio. d. #his stoc9 is undervaluedG you shouldn@t consider addin0 it to your portfolio.
A !" < $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," Applicative 15. %unda-ental analysis deter-ines the value of a stoc9 based on a. dividends. b. the e2pected final sale price. c. the ability of the corporation to earn profits. d. All of the above are correct.
A !" $ $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." %unda-ental analysis /!," $efinitional

17. If stoc9 prices follo1 a rando- 1al9, it -eans a. lon0 periods of declinin0 prices are follo1ed by lon0 periods of risin0 prices. b. the 0reater the nu-ber of consecutive days of price declines, the 0reater the probability prices 1ill increase the follo1in0 day. c. stoc9 prices are unrelated to rando- events that shoc9 the econo-y. d. stoc9 prices are 8ust as li9ely to rise as to fall at any 0iven ti-e. $I%" & '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
73
A !" $ A#" Analytic #+." 'ando- 1al9 17.
!o-e people clai- that stoc9s follo1 a rando- 1al9. Dhat does this -eanB a. #he price of stoc9 one day is about 1hat it 1as on the previous day. b. ,han0es in stoc9 prices cannot be predicted fro- available infor-ation. c. !toc9 prices are not deter-ined by -ar9et funda-entals such as supply and de-and. d. .rices of stoc9s of different fir-s in the sa-e industry sho1 no or little tendency to -ove to0ether. $I%" & '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" < A#" Analytic #+." 'ando- 1al9 18.
If stoc9 prices follo1 a rando- 1al9, then stoc9 investors can -a9e lar0e profits by a. buyin0 stoc9s 1hose prices have been fallin0 for several days. b. buyin0 stoc9s 1hose prices have been risin0 for several days. c. perfor-in0 funda-ental analysis of stoc9s usin0 data contained in annual reports. d. usin0 inside infor-ation. $I%" & '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," Interpretive
A !" $ A#" Analytic #+." 'ando- 1al9 1;.
#he efficient -ar9ets hypothesis says that a. only individual investors can -a9e -oney in the stoc9 -ar9et. b. it should be difficult to find stoc9s 1hose price differs fro- their funda-ental value. c. stoc9 prices do not follo1 a rando- 1al9. d. All of the above are correct.
A !" < $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional &0. Accordin0 to the efficient -ar9et hypothesis, 1hich of the follo1in0 state-ents is not correctB a. !toc9 -ar9et prices tend to rise today if they rose yesterday. b. As 8ud0ed by the typical person in the -ar9et, all stoc9s are fairly valued all the ti-e. c. At the -ar9et price, the nu-ber of shares bein0 offered for sale -atches the nu-ber of shares people 1ant to buy. d. All of the above state-ents are incorrect.
A !" A $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional &1. Accordin0 to the efficient -ar9ets hypothesis, better)than)e2pected ne1s about a corporation 1ill a. have no effect on it@s stoc9 price. b. raise the price of the stoc9. c. lo1er the price of the stoc9. d. chan0e the price of the stoc9 in a rando- direction.
A !" < $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," Interpretive
74
&&.

Accordin0 to the efficient -ar9ets hypothesis, 1orse)than)e2pected ne1s about a corporation 1ill a. have no effect on its stoc9 price. b. raise the price of the stoc9. c. lo1er the price of the stoc9. d. chan0e the price of the stoc9 in a rando- direction.
A !" , $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," Interpretive &3. An inde2 fund a. holds only stoc9s and bonds that are inde2ed to inflation. b. holds all the stoc9s in a 0iven stoc9 inde2. c. 0uarantees a return that follo1s the inde2 of leadin0 econo-ic indicators. d. typically has a lo1er return than a -ana0ed fund. $I%" 1 '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" < A#" Analytic #+." Inde2 funds &4.
If the efficient -ar9et hypothesis is correct, then a. inde2 funds should typically beat -ana0ed funds, and usually do. b. inde2 fund should typically beat -ana0ed funds, but usually do not. c. -utual funds should typically beat inde2 funds, and usually do. d. -utual funds should typically bet inde2 funds, but usually do not.
A !" A $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis : Inde2 funds /!," Applicative &5. 'esearch studies have sho1n that a. the correlation bet1een ho1 1ell a stoc9 does one year and ho1 1ell it does the ne2t is si0nificantly 0reater than Fero. b. -ana0ed -utual funds 0enerally outperfor- inde2ed -utual funds. c. people tend to be overconfident 1hen -a9in0 invest-ent decisions. d. All of the above are correct.
A !" , $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional &7. Dhich of the follo1in0 is correctB a. /ana0ed funds typically have a hi0her return than inde2ed funds. #his tends to refute the efficient -ar9et hypothesis. b. /ana0ed funds typically have a hi0her return than inde2ed funds. #his tends to support the efficient -ar9et hypothesis. c. Inde2 funds typically have a hi0her rate of return than -ana0ed funds. #his tends to refute the efficient -ar9et hypothesis. d. Inde2 funds typically have a hi0her rate of return than -ana0ed funds. #his tends to support the efficient -ar9et hypothesis.
A !" $ $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional &7. Dhich of the follo1in0 is not consistent 1ith the efficient -ar9et hypothesisB a. !toc9 prices should follo1 a rando- 1al9. b. Inde2 funds should typically outperfor- hi0hly -ana0ed funds. c. e1s has no effect on stoc9 prices.. d. #here is little point in spendin0 -any hours studyin0 the business pa0es loo9in0 for undervalued stoc9s.
A !" , $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," Interpretive

&8.
75
Accordin0 to the efficient -ar9ets hypothesis, 1hich of the follo1in0 1ould increase the price of stoc9 in the /c,loud ,orporationB a. /c,loud announces, 8ust as everyone had e2pected, that it has hired a ne1 hi0hly respected ,(+. b. /c,loud announces that its profits 1ere lo1, but not as lo1 as the -ar9et had e2pected. c. Analysis by a colu-n in a business 1ee9ly indicates that /c,loud is overvalued. d. All of the above 1ould increase the price.
A !" < $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," Applicative &;. !uppose that interest rates une2pectedly rise and that ,arter ,orporation announces that revenues fro- last Cuarter 1ere do1n but not as -uch as the public had anticipated they 1ould be do1n. Accordin0 to the efficient -ar9ets hypothesis, 1hich of the these thin0s -a9e the price of ,arter ,orporation !toc9 fallB a. both the interest rate risin0 and the revenue announce-ent b. neither the interest rate risin0 nor the revenue announce-ent c. only the interest rate risin0 d. only the revenue announce-ent
A !" , $I%" 3 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." .resent value : %unda-ental analysis /!," Analytical 30. %unda-ental analysis sho1s that Ereen *eaf #ea ,o-pany is fairly valued. #hen Ereen *eaf #ea ,o-pany une2pectedly i-proves its production techniCues and une2pectedly hires a ne1 ,(+ a1ay fro- another very successful tea producer. !uppose this has no effect on the price of the stoc9 of Ereen *eaf #ea ,o-pany. a. %unda-ental analysis 1ould no1 sho1 the corporation is overvalued. #he fact that the price 1as unchan0ed is consistent 1ith the efficient -ar9ets hypothesis. b. %unda-ental analysis 1ould no1 sho1 the corporation is overvalued. #he fact that the price 1as unchan0ed is not consistent 1ith the efficient -ar9ets hypothesis. c. %unda-ental analysis 1ould no1 sho1 the corporation is undervalued. #he fact that the price 1as unchan0ed is consistent 1ith the efficient -ar9ets hypothesis. d. %unda-ental analysis 1ould no1 sho1 the corporation is undervalued. #he fact that the price 1as unchan0ed is not consistent 1ith the efficient -ar9ets hypothesis.
A !" $ $I%" 3 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis : %unda-ental analysis /!," Analytical 31. In the late 1;;0s, %ed ,hairperson Alan Ereenspan believed that the -ar9et 1as a. overvalued, but stoc9 prices continued to rise throu0h -id &00&. b. overvalued, and stoc9 prices fell by -id &00&. c. undervalued, but stoc9 prices continued to fall into -id &00&. d. undervalued, but stoc9 prices continued to rise even into -id &00&.
A !" < $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional 3&. In the late 1;;0s, %ed ,hair Alan Ereenspan believed that the -ar9et 1as a. undervalued, and evidence later sho1ed that this 1as clearly correct. b. undervalued, but 1hether it 1as re-ains debatable. c. overvalued, and evidence later sho1ed that this 1as clearly correct. d. overvalued, but 1hether it 1as re-ains debatable.
A !" $ $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation /!," $efinitional
77
33.

Dhich of the follo1in0 is not correctB a. #here is a 0reater reduction in ris9 by increasin0 the nu-ber of stoc9s in a portfolio fro- 1 to 10, than by increasin0 it fro- 100 to 1&0 stoc9s. b. #he historical rate of return on stoc9s has been about 5 percenta0e points hi0her than the historical rate of return on bonds. c. !toc9 in an industry that is very sensitive to econo-ic conditions is li9ely to have a hi0her avera0e return than stoc9 in an industry that is not so sensitive to econo-ic conditions. d. If you had infor-ation about a corporation that no one else had, you could earn a very hi0h rate of return. #his contradicts the efficient -ar9et hypothesis. $I%" 1 '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" $ A#" Analytic #+." !toc9 34.
Dhich of the follo1in0 is correct concernin0 stoc9 -ar9et irrationalityB a. <ubbles could arise, in part, because the price that people pay for stoc9 depends on 1hat they thin9 so-eone else 1ill pay for it in the future. b. (cono-ists al-ost all a0ree that the evidence for stoc9 -ar9et irrationality is convincin0 and the departures fro- rational pricin0 are i-portant. c. !o-e evidence for the e2istence of -ar9et irrationality is that infor-ed and presu-ably rational -ana0ers of -utual funds 0enerally beat the -ar9et. d. All of the above are correct.
A !" A $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation /!," Interpretive 35. Dhenever the price of an asset rises above 1hat appears to be its funda-ental value, the -ar9et is said to be e2periencin0 a. a con8ectural -ista9e. b. a funda-ental -ishap. c. a speculative bubble. d. a neuroecono-ic fla1.
A !" , $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation /!," $efinitional 37. #he possibility of speculative bubbles in the stoc9 -ar9et arises in part because a. stoc9 prices -ay not depend at all on psycholo0ical factors. b. funda-ental analysis -ay be the correct 1ay to evaluate the value of stoc9s. c. future strea-s of dividend pay-ents are very hard to esti-ate. d. the value of shares of stoc9 depends not only on the future strea- of dividend pay-ents but also on the price at 1hich the stoc9 1ill be sold.
A !" , $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation /!," Interpretive 37. $iversification a. increases the li9ely fluctuation in a portfolio>s return. #hus, the li9ely standard deviation of the portfolio>s return is hi0her. b. increases the li9ely fluctuation in a portfolio>s return. #hus, the li9ely standard deviation of the portfolio>s return is lo1er. c. reduces the li9ely fluctuation in a portfolio>s return. #hus, the li9ely standard deviation of the portfolio>s return is hi0her. d. reduces the li9ely fluctuation in a portfolio>s return. #hus, the li9ely standard deviation of the portfolio>s return is lo1er.
A !" $ $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." $iversification /!," $efinitional

38. #he value of a stoc9 is based on the a. present values of the dividend strea- and final price. !o, the value of a stoc9 rises 1hen interest rates rise. b. present values of the dividend strea- and final price. !o, the value of a stoc9 falls 1hen interest rates rise. c. future values of the dividend strea- and final price. !o, the value of a stoc9 rises 1hen interest rates rises. d. future values of the dividend strea- and final price. !o, the value of a stoc9 falls 1hen interest rates rise.
77
A !" < $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation : !toc9 /!," Analytical 3;. !uppose that an increased ris9 of -ort0a0e defaults lo1ers the e2pected profitability of ban9s. #hen 1e 1ould e2pect to see a. the de-and for ban9 stoc9s rise 1hich 1ould raise the prices of ban9 stoc9s. b. the de-and for ban9 stoc9s rise 1hich 1ould reduce the prices of ban9 stoc9s. c. the de-and for ban9 stoc9s fall 1hich 1ould raise the prices of ban9 stoc9s. d. the de-and for ban9 stoc9s fall 1hich 1ould reduce the prices of ban9 stoc9s.
A !" $ $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation : !toc9 /!," Analytical 40. A soup -anufacturer une2pectedly announces that it has hired a ne1 -ana0er. It is 1idely believed that this -ana0er 1ill raise the profitability of the corporation. At the sa-e ti-e interest rates une2pectedly rise. Dhich of the above 1ould tend to -a9e the price of the stoc9 riseB a. the announce-ent and the rise in interest rates b. the announce-ent but not the rise in interest rates c. the rise in interest rates, but not the announce-ent d. neither the announce-ent nor the rise in interest rates
A !" < $I%" 3 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." Asset valuation : !toc9 /!," Analytical 41. #he efficient -ar9ets hypothesis i-plies a. that all stoc9s are fairly valued all the ti-e and that no stoc9 is a better buy than any other. b. that all stoc9s are fairly valued all the ti-e, but that so-e stoc9s -ay be better buys than other. c. that so-e stoc9s -ay be better buys than others and stoc9 e2perts can deter-ine 1hich ones. d. that no stoc9 is efficiently valued.
A !" A $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional 4&. #he efficient -ar9ets hypothesis i-plies that a. buildin0 a portfolio based on a published list of the H-ost respectedI co-panies is li9ely to produce a better)than)avera0e return. b. if a stoc9 rose in price last year, it is li9ely to rise in price this year. c. -ana0ed -utual funds should 0enerally outperfor- inde2ed -utual funds. d. one of the above are correct.
A !" $ $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," $efinitional 43. #he efficient -ar9ets hypothesis says that beatin0 the -ar9et consistently is a. i-possible. /any studies find that beatin0 the -ar9et is, at best, e2tre-ely difficult. b. i-possible. /any studies find that beatin0 the -ar9et is relatively easy. c. relatively easy. /any studies find that beatin0 the -ar9et is, at best, e2tre-ely difficult. d. relatively easy. /any studies find that beatin0 the -ar9et is relatively easy.
78
A !" A $I%" 1 '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." (fficient -ar9ets hypothesis /!," Interpretive 44. If you are convinced that stoc9 prices are i-possible to predict fro- available infor-ation, then you probably also believe that a. the efficient -ar9ets hypothesis is not a correct hypothesis. b. the stoc9 -ar9et is infor-ationally efficient. c. the stoc9 -ar9et is infor-ationally inefficient. d. there is no reason to establish a diversified portfolio of stoc9s.
A !" < $I%" & '(%" &7)3 A#" Analytic *+," #he !tudy of econo-ics, and definitions of econo-ics #+." 'ando- 1al9 : !toc9 /!," Interpretive 45. In &005, the #all $treet %ournal reported that researchers in an interdisciplinary field called neuroeconomics had concluded a study that su00ests that a. biolo0y plays no role in econo-ic decision)-a9in0. b. psychotherapy directed at i-provin0 econo-ic decision)-a9in0 can produce beneficial results. c. people 1ho are very e-otional -ay -a9e better financial decisions than other people. d. people 1ith certain 9inds of brain disorders -ay -a9e better financial decisions than other people. $I%" 1 '(%" &7)3 *+," #he !tudy of econo-ics, and definitions of econo-ics /!," $efinitional
A !" $ A#" Analytic #+." (cono-ists

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Chapter 27 The Basic Tools of Finance

,hapter &73#he <asic #ools of %inance

,hapter &73#he <asic #ools of %inance

,hapter &73#he <asic #ools of %inance

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