Chapter 18 Test Bank Key
1. An institution that makes savings available to investors is known as
2. Which of the following is an example of a financial intermediary?
A. Stock markets.
3. Which of the following is an example of a financial intermediary?
A. Banks.
4. The function of financial intermediaries is to transfer purchasing power from
5. Financial intermediaries
A. Increase search and information costs for savers and investors.
6. Financial intermediaries make the allocation of resources more efficient by
7. Market participants are likely to save a portion of current income if they
A. Place a higher value on future consumption than on current consumption.
8. The decision to save is influenced by all of the following except
A. Time preferences.
9. Higher interest rates
A. Decrease the quantity of loanable funds.
10. The supply of loanable funds is determined by all of the following except
11. Risk premiums do all of the following except
A. Help explain why banks charge different customers different interest rates.
12. The risk premium is the
13. All of the following statements about banks in Zimbabwe in 2009 are true except
14. As long as interest-earning opportunities exist, present dollars are worth
A. More than future dollars.
15. Which of the following statements about money is not true?
A. Income-earning investment opportunities exist.
16. Present discounted value refers to the
A. Future value of today’s dollars.
17. Higher interest rates
A. Reflect a higher opportunity cost of money.
18. Lower interest rates
A. Lower the present value of future payments.
19. The present discounted value of a future payment can be calculated using which of the following formulas?
20. If the interest rate is 8 percent, then the present discounted value of $100 to be received two years from now
is closest to
21. The present discounted value of $60,000 to be received at the end of three years when the interest rate is 10
percent is closest to
22. The present discounted value of $100 to be received one year from now, if the interest rate is 2.5 percent, is
closest to
23. The present discounted value of a future payment will increase when the
A. Interest rate decreases.
B. Future payment is moved further into the future.
C. Risk of nonpayment increases.
D. Opportunity cost of money increases.
The present discounted value of a future payment increases with either lower interest rates or shorter delays
in future payment.
24. The present discounted value of a future payment will decrease when the
A. Interest rate increases.
25. The value of future payments is affected by
26. The expected value of a future payment differs from the present discounted value in that the expected value
A. Takes into account the possibility of nonpayment.
27. Expected value refers to the
28. As the uncertainty attached to a future payment _______, the expected value _______.
A. decreases; decreases
29. Which of the following is the equation for determining an expected value?
A. (1 – Risk factor) ×PDV.
30. If the present discounted value of a payment is $1,000,000 and there is a 40 percent chance that the
payment will not occur, then the expected value is
31. Suppose Regis has a 25 percent chance of not collecting $1,000 in one year. If the interest rate is 10
percent, what is the expected value of the future payment?
A. $750.
32. Suppose Carlos has a 60 percent chance of not collecting $100,000 when his rich uncle dies in 10 years.
Juanita wants to buy the rights to this possible inheritance from Carlos. How much is the possible inheritance
currently worth to Carlos? Assume the interest rate is 9 percent.
33. Suppose you purchase shares in Acme Gadget Company for $10 per share. The company believes there is a
20 percent chance it will fail to earn a discounted future profit of $1.85. What is the expected rate of return on
your investment?
A. 18.5 percent.
34. Suppose you purchase shares in Papa’s Pizza for $20 per share. The company believes there is a 40 percent
chance it will fail to earn a discounted future profit of $2.59. What is the expected rate of return on your
investment?
35. The quantity of loanable funds available to a corporation depends on the
A. Dividends the company is willing to pay.
36. In the loanable funds market,
37. Which of the following will cause the demand for loanable funds to increase?
38. If the expected rate of return decreases
A. The demand for loanable funds will increase.
39. The price paid for the use of money is defined as the
40. The intersection of the demand for loanable funds and the supply of loanable funds determines the
A. Real interest rate.
41. As the interest rate increases, ceteris paribus, the trade-off between present and future consumption
quantity of funds supplied goes up and current consumption goes down.
42. As the prevailing interest rate increases, all of the following occur except
43. As interest rates decline, all of the following will result except
A. Quantity demanded of loanable funds increases.
44. As the prevailing interest rate decreases, the opportunity cost of money
45.
Figure 32.1 represents the market for loanable funds. Which of the following is true at the equilibrium
interest rate?
46.
Figure 32.1 represents the market for loanable funds. The equilibrium interest rate
47. In which form of business is a single individual responsible for the repayment of any debts?
A. Proprietorship.
48. In a publicly traded corporation, which of the following is responsible for business debts and activities?
A. The individual stockholders.
49. The owners of which type of firm have the most liability?
50. The owners of which type of firm have the least liability?
A. Corporation.
51. The owners of a corporation are
A. Liable for its debts.
52. Shares of ownership in a corporation are known as
53. A corporation can elect to allocate corporate profits into either
54. Dividends are equal to
55. Dividends are
A. The amount of corporate profit paid out for each share of stock.
56. Retained earnings are
A. The only motive for purchasing stock.
57. The amount of corporate profits not paid out in dividends is known as
58. Capital gains are
59. An increase in the value of an asset, such as a stock, is called
60. A motivation for holding stock is
61. Which of the following is not a reason to hold stock?
62. The first sale to the general public of stock in a corporation is referred to
63. The purpose of an initial public offering is to
A. See if there is a demand for a company’s new product.
ownership, not debt.
64. An initial public offering
A. Allows a company to borrow funds for investment and growth.
65. The P/E ratio, or price to earnings ratio of a stock, can be computed using which of the following formulas?
A. (Revenue per share) ÷ (Price of stock share).
66. If Shoffner Inc., a publicly traded corporation, has a share price of $125, revenues of $15.35 per share,
and profits of $5.25 per share, what is the P/E ratio for Shoffner Inc. shares?
67. Suppose the Martin Microchip Corporation earns a profit of $20 per share of stock. If the prevailing interest
68. The most important determinant of how much an individual will pay for a share of stock is
69. Ceteris paribus, the price of a stock will definitely increase when the
70. The price of a stock will increase, ceteris paribus, when
A. Future earnings expectations increase.
71. The price of a stock will increase, ceteris paribus, when