194.
If the interest rate is 4%, in which of the following cases is the future value the largest?
a.
An initial value of $1,000 deposited for 5 years.
b.
An initial value of $950 deposited for 6 years.
c.
An initial value of $900 deposited for 7 years.
d.
An initial value of $850 deposited for 8 years.
195.
Vince says that the present value of $500 to be received one year from today if the
interest rate is 8 percent is
more than the present value of $500 to be received two years
from today if the interest rate is 4 percent. Terri says
that $500 saved for two years at
an interest rate of 3 percent has a larger future value than $500 saved for one
years at
an interest rate of 6 percent.
a.
Both Vince and Terri are correct.
b.
Only Vince is correct.
c.
Only Terri is correct.
d.
Neither Vince nor Terri is correct.
196.
You have been promised a payment of $100,000 in the future. In which case is the
present value of this future
payment highest?
a.
You receive the payment 2 years from now and the interest rate is 6 percent.
b.
You receive the payment 2 years from now and the interest rate is 4 percent.
c.
You receive the payment 3 years from now and the interest rate is 6 percent.
d.
You receive the payment 3 years from now and the interest rate is 4 percent.
197.
Suppose the interest rate is 5 percent. Which of the following payment options has the
highest present value today?
a.
$550 one year from today.
b.
$580 two years from today.
c.
$600 three years from today.
d.
$615 four years from today.
198.
La Rossa Pasta Company is considering expanding its factory. In which case would both
the change in the cost and the change in the interest rate each make it less likely that La
Rossa’s would expand?
a.
a decrease in the cost of expanding and a decrease in the interest rate.
b.
a decrease in the cost of expanding and an increase in the interest rate.
c.
an increase in the cost of expanding and a decrease in the interest rate.
d.
an increase in the cost of expanding and an increase in the interest rate.
199.
A bond promises to pay $500 in one year and $10,500 in two years. What is the correct
way to find the present
value of this bond?
a. $500(1 + r) + $10,500/(1 + r)2
b. $500/(1 + r) + $10,500/(1 + r)2
c. $11,000/(1 + r)2
d. $500(1 + r) + $10,500(1 + r)2
200.
If the interest rate is 2.49 percent, then what is the present value of $5,000 to be
received in 4 years?
a. $4,531.52
b. $4,878.52
c. $5,124.50
d. $5,516.91
201.
Suppose you purchase a savings bond today for $25. In seven years you may cash in the
savings bond for $50. What is the approximate interest rate paid by the savings bond?
a.
5%
b.
10%
c.
15%
d.
20%
202.
If you deposit $1,000 into a savings account that pays you 5% interest per year,
approximately how long will it take
to double your money?
a.
8 years
b.
10 years
c.
12 years
d.
14 years
203.
Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10%
interest rate to be paid out to the
child when she turns 21 years old. Approximately how
many times will the investment double by the time it is paid
out to the child?
a.
2 times
b.
3 times
c.
4 times
d.
8 times
204.
Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent,
then at what value of X would you be indifferent between the two options?
a. X = 809.33
b. X = 855.56
c. X = 895.42
d. X = 916.74
205.
Suppose you win the lottery and one of your payment options is to receive $20,000 today,
$20,000 one year from
now, and $20,000 two years from now. If the interest rate is 5%,
what is the present value of this option?
a. $51,830.26
b. $54,464.96
c. $57,188.21
d. $58,237.71
206.
You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4
percent, what is the future
value of this $2,000?
a. $3,494.40
b. $3,585.85
c. $3,601.89
d. $3,676.14
Multiple Choice – Section 02: Managing Risk
1.
Risk aversion helps to explain various things we observe in the economy, including
a.
adherence to the old adage, “Don’t put all your eggs in one basket.”
b.
insurance.
c.
the risk-return trade-off.
d.
All of the above are correct.
2.
Risk aversion helps to explain various things we observe in the economy, including
a.
adherence to the old adage, “Don’t put all your eggs in one basket.”
b.
insurance.
c.
the risk-return trade-off.
d.
All of the above are correct.
3.
Economists have developed models of risk aversion using the concept of
a.
utility and the associated assumption of diminishing marginal utility.
b.
utility and the associated assumption of increasing marginal utility.
c.
income and the associated assumption of diminishing marginal wealth.
d.
income and the associated assumption of increasing marginal wealth.
4.
If Joanna is risk averse, then
a.
her utility function exhibits the property of decreasing utility.
b.
her utility function exhibits the property of increasing marginal utility.
c.
she dislikes bad things more than she likes comparable good things.
d.
she is unlike most people, because most people are not risk averse.
5.
For a risk averse person,
a.
the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet.
b.
the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
c.
the utility function exhibits the property of increasing marginal utility.
d.
the utility function gets steeper as wealth increases.
6.
Diminishing marginal utility of wealth implies that the utility function
a.
has increasing slope and a person is risk averse.
b.
has increasing slope and a person is not risk averse.
c.
has decreasing slope and a person is risk averse
d.
has decreasing slope and a person is not risk averse.
7.
Matt’s Utility Function
Wealth
Utility
$50,000
7000
51,000
7250
52,000
7499
53,000
7746
If Matt’s current wealth is $51,000, then
a.
his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is
risk averse.
b.
his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is
not risk
averse.
c.
his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk
averse.
d.
his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not
risk averse.
8.
David’s Utility Function
Wealth
Utility
$60,000
500
$61,000
505
$62,000
509
$63,000
512.5
If David’s current wealth is $61,000, then
a.
his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk
averse.
b.
his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not
risk averse.
c.
his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is
risk averse.
d.
his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is
not risk
averse.
6652 The Basic Tools of Finance
Figure 27-1. The figure shows a utility function.
9.
Refer to Figure 27-1. What is measured along the vertical axis?
a.
risk aversion
b.
marginal utility
c.
utility
d.
the number of units of a good that can be purchased
10.
Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing
a.
wealth.
b.
utility.
c.
marginal wealth.
d.
marginal utility.
11.
Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an
increase in
wealth from $600 to $800?
a.
the distance between the origin and point B
b.
the distance between the origin and point C
c.
the distance between point A and point C
d.
the distance between point B and point C
12.
Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB
represent the
distance between point A and point B; etc. Which of the following ratios best
represents the marginal utility per
dollar when wealth increases from $400 to $600?
a.
b.
c.
d.
13.
Refer to Figure 27-1. For the person to whom this utility function applies,
a.
the more wealth she has, the less utility she gets from an additional dollar of wealth.
b.
the more wealth she has, the more utility she gets from an additional dollar of wealth.
c.
her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than
it would be
by an increase in wealth from $400 to $600.
d.
her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or
by an
increase in wealth from $400 to $600.
14.
Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600
in wealth. Starting
from there,
a.
she would be willing to accept a coin-flip bet that would result in her winning $200 if the result
was “heads”
or losing $200 if the result was “tails.”
b.
the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth.
c.
the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth.
d.
the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.
15.
Refer to Figure 27-1. The properties exhibited by this utility function help to explain various
things we observe in
the economy, including
a.
the risk-return tradeoff.
b.
insurance.
c.
diversification.
d.
All of the above are correct.
6656 The Basic Tools of Finance
Figure 27-2. The figure shows a utility function for Britney.
16.
Refer to Figure 27-2. From the appearance of the utility function, we know that
a.
Britney is risk averse.
b.
Britney gains less satisfaction when her wealth increases by X dollars than she loses in
satisfaction when her
wealth decreases by X dollars.
c.
the property of diminishing marginal utility applies to Britney.
d.
All of the above are correct.
17. Refer to Figure 27-2. From the appearance of the utility function, we know that
a.
Britney is risk averse.
b.
Britney gains more satisfaction when her wealth increases by X dollars than she loses in
satisfaction when
her wealth decreases by X dollars.
c.
the property of increasing marginal utility applies to Britney.
d.
All of the above are correct.
18.
Refer to Figure 27-2. Suppose the vertical distance between the points (0, A) and (0, B) is 5. If
her wealth
increased from $1,050 to $1,350, then
a.
Britney’s subjective measure of her well-being would increase by less than 5 units.
b.
Britney’s subjective measure of her well-being would increase by more than 5 units.
c.
Britney would change from being a risk-averse person into a person who is not risk averse.
d.
Britney would change from being a person who is not risk averse into a risk-averse person.
6658 The Basic Tools of Finance
a.
if Britney owns a house, she would not consider buying fire insurance.
b.
Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a
standard
deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and
a standard deviation of
5 percent.
c.
Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a
standard
deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and
a standard deviation of
3 percent.
d.
All of the above are correct.
20.
Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,
a.
she would be willing to accept a coin-flip bet that would result in her winning $300 if the result
was “heads”
or losing $300 if the result was “tails.”
b.
the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth.
c.
the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth.
d.
the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.
21.
Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following
coin-flip bets would
she definitely not be willing to accept?
a.
If it is “heads,” she wins $100; if it is tails, she loses $95.
b.
If it is “heads,” she wins $150; if it is tails, she loses $150.
c.
If it is “heads,” she wins $150; if it is tails, she loses $140.
d.
She definitely would not accept any of these bets.
6660 The Basic Tools of Finance
Figure 27-3
The following figure shows the utility function for Paul.
22.
Refer to Figure 27-3. Suppose the vertical distance between the points (0, A) and (0, B) is 10.
If his wealth
increased from $700 to $900, then
a.
Paul’s utility would increase by less than 10 units.
b.
Paul’s utility would increase by more than 10 units.
c.
Paul’s utility would increase by exactly 10 units.
d.
Any of the above could be correct.