Chapter 17 – Financial Economics
1. Economic investment refers to:
2. Financial investment refers to:
Chapter 17 – Financial Economics
3. Which one of the following is an example of an economic investment?
4. Which one of the following is an example of a financial investment?
5. Time value of money refers to the idea that a specific amount of money:
Chapter 17 – Financial Economics
6. Which of the following would best be a brief definition of present value?
7. Compound interest describes increases in value when interest is paid, or compounded, on:
8. A homeowner takes out a mortgage for $100,000 that has a compound interest rate of 5
percent per year over 15 years. What will the approximate loan total be in 15 years, if no
repayment is made at all over that period?
Chapter 17 – Financial Economics
9. A bank makes an auto loan for $10,000 at an annual rate of 6 percent. After two years, the
loan value will total:
10. You deposit $5,000 in a 5-year bank CD that pays 3% interest per year. How much will
you get from this deposit be at maturity?
11. A manufacturing firm takes out a $500,000 loan to expand its plant. The loan has an
annual interest rate of 7 percent. What would be the total compounded interest on the loan at
the end of five years, excluding the principal?
Chapter 17 – Financial Economics
12. A bank account pays 4% interest per year. If you deposit $1,000 into this account at the
start of each year for three years, how much will your account balance be at the end of three
years?
13. Other factors constant, the future value will be smaller:
14. A bond pays a coupon rate of 5 percent each year for five years, with a future (face) value
of $200. If the bond was sold today, what would be the present value of the bond?
Chapter 17 – Financial Economics
15. A bond that pays annual interest (or coupons) and a face value at maturity will fetch a
price today that is equal to the:
16. Other factors constant, the present value will be larger:
17. You would like to have $50,000 for a new car in six years. If you deposit money today in
a bank CD that pays 4% per year, how much must your deposit be?
Chapter 17 – Financial Economics
18. You estimate that a piece of real estate will be worth $700,000 in five years. The current
interest rate is 3 percent. What is the present value of this investment?
19. Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new
portable music player next year. The current market rate is 5 percent. What is the present
value of this promotional budget?
20. Tracy won a $100 million jackpot. She can receive the jackpot as a $5 million payment
each year for 20 years, or she can ask to receive the present value of those payments all at
once now. Assume an annual interest rate of 5 percent. If she decides to take the present value
payment, about how much will she receive?
Chapter 17 – Financial Economics
21. Joe Swing is a baseball player negotiating a contract. He is usually paid $10 million a year
for playing, but the salary caps for his team means that he will have to be paid $5 million this
year and the remainder next year. If the interest rate is 8 percent, how much will that
remaining amount be next year?
22. Matt Hoops, a star basketball player, is looking to join a new NBA team. The Bulls are
offering him $24 million for one year. The Heat is offering him $10 million this year and $7.0
million in each of the next two years. The market interest rate is 5 percent. What is the present
value of the offer from The Heat in millions rounded to the nearest one hundred thousand?
Chapter 17 – Financial Economics
23. David Kick is looking to play for a U.S. MLS team. D.C. United is offering him $50
million for his first year. The Chicago Fire is offering him $25 million his first year and $10
million per year for the following three years. The market interest rate is 5 percent. Which is
the better deal in terms of present value in millions?
24. Roger has the opportunity to invest $100,000 in two different assets. The investment in
Asset #1 will have a present value of $120,000. The investment in Asset #2 is expected to
have a future value of $140,000 in four years. If the market interest rate is 5 percent a year,
which would be the better investment?
Chapter 17 – Financial Economics
25. Matthew has the opportunity to purchase a new home. The house in Glen Oaks is
currently worth $250,000 but is predicted to be worth $270,000 in a year. What is the rate of
appreciation for the house from one year to the next?
26. Which one of the following is a feature of all investments?
27. Which one of the following is a feature of all investments?
Chapter 17 – Financial Economics
28. Which of the following is a popular type of investment?
29. What do stocks represent?
30. What do bonds represent?
Chapter 17 – Financial Economics
31. What is one basic difference between stocks and bonds?
32. A stock investor may expect returns in the form of:
33. The limited liability rule means that if a corporation goes bankrupt:
Chapter 17 – Financial Economics
34. If stockholders sell their shares for more than they paid for them they:
35. Equal shares of a firm’s profit are paid out as:
36. The primary risk that bondholders face is that the:
Chapter 17 – Financial Economics
37. A key difference between stocks and bonds for the holders of such investments is that:
38. The U.S. Federal government is unlikely to default on its bonds because:
39. Which one of the following would best describe a mutual fund?
Chapter 17 – Financial Economics
40. Investments that are designed to match exactly the performance of a group of stocks like
the Dow Jones Industrial Average or the S&P-500 are called:
41. Which one of the following is true?
42. One fundamental concept in financial economics is that an investment’s rate of return is:
Chapter 17 – Financial Economics
43. A bond that is currently selling at $1000 offers to pay $50 annually. What is the
percentage rate of return on the bond?
44. Terri buys a house for $200,000 and expects to sell it in three years for $300,000. Her
expected percentage rate of return over that three-year period is:
45. Shawna bought an antique table for $200 last year and is now selling it for $250. Her
expected percentage rate of return is:
Chapter 17 – Financial Economics
46. Burt bought a house for $250,000 and plans to rent it out for $2,000 per month. His
expected annual rate of return from renting the house is approximately:
47. Rupert recently purchased a non-maturing bond for $10,000 that pays $350 semi-annual
coupons. His expected rate of return per year on the bond is:
48. Alma recently purchased a Mexican restaurant for $450,000 from which she expects to
earn a monthly profit of $1,500. Her expected annual rate of return is:
Chapter 17 – Financial Economics
49. Susan recently purchased a home for $150,000. She plans to rent it out for $1,000 per
month for a year. Had the house cost $200,000 instead, her expected rate of return would
have:
50. Rick recently purchased an auto mart for $500,000. He expects monthly profits to total
$10,000 for the next year. If a recession has struck, and Rick had instead paid $300,000 while
his monthly income was reduced to $6000, his expected rate of return would have:
51. If the demand for an asset increases, then its:
Chapter 17 – Financial Economics
52. The buying or selling that occurs to equalize the rates of return on identical or nearly
identical assets is:
53. An investor owns bond #1 that has a rate of return of 10 percent, but a similar bond #2 has
an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher
return, the investor is engaging in:
54. Assume that there are two firms very similar in all respects, but Firm A’s stock has a
higher rate of return than Firm B’s stock. Arbitrage will occur as investors:
Chapter 17 – Financial Economics
55. Assume that there are two investments very similar in all respects, but Investment X has a
higher rate of return than does Investment Y. As a result of the arbitrage process, the price of
Investment:
56. If we observe that many investors are selling Bond A and buying a similar Bond B, this
suggests that the expected returns on:
57. Risk in finance means that an asset: