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Chapter 17 - Financial Economics
1. What are the two most important factors influencing investor preferences?
2. Which of the following is an economic investment?
Chapter 17 - Financial Economics
3. Which of the following statements is true about buying an old factory?
4. Which of the following is both an economic and financial investment?
5. What is the difference between economic and financial investments?
Chapter 17 - Financial Economics
6. Isaiah just purchased a house built in 1986. His purchase would be considered:
7. The idea that money has "time value" refers to the fact that:
8. According to the concept of the time-value of money:
Chapter 17 - Financial Economics
9. Present value is best defined as the:
10. Which of the following statements best reflects the concept of present value?
11. Compound interest:
Chapter 17 - Financial Economics
12. $200 invested at an annual interest rate of 5 percent will be worth how much at the end of
1 year?
13. $200 invested in a savings account paying an annual interest rate of 5 percent will be
worth how much at the end of 5 years, assuming all interest earned remains in the account?
14. $500 invested at an annual interest rate of 8 percent will be worth how much at the end of
1 year?
Chapter 17 - Financial Economics
15. $800 invested at an annually compounded interest rate of 6 percent will be worth how
much at the end of 10 years?
16. Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6
percent to be repaid after 5 years. How much will be required to pay off the loan at the end of
the 5 years?
17. Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will
repay at the end of 10 years. How much will be required to pay off the loan at the end of 10
years?
Chapter 17 - Financial Economics
18. Peter is saving money for a vacation he wants to take 5 years from now. If the trip will
cost $1000 and he puts his money into a savings account paying 4 percent interest,
compounded annually, how much would Peter need to deposit today to reach his goal without
making further deposits?
19. What is the present value of $5000 to be received 10 years from now if the interest rate is
10 percent?
20. Calculate the present value of an asset worth $2000 four years from now if the interest
rate is 6 percent.
Chapter 17 - Financial Economics
21. What is the present value of $500 to be received 8 years from now if the interest rate is 5
percent?
22. (Advanced analysis) Kara has $2000 to invest today that she wants to grow to $3000 in 5
years. What annually compounded rate of interest would she have to earn to reach her goal?
23. (Advanced analysis) Alex wants to have $800 saved up at the end of 10 years. If he
deposits $500 today, what annually compounded rate of interest would he have to earn to
reach his goal?
Chapter 17 - Financial Economics
24. (Advanced analysis) Ricardo deposits $1000 into his savings account. What rate of
interest would he have to earn on his savings for his deposit to be worth $2000 in 8 years?
25. (Advanced analysis) Indy has $2000 invested in a financial asset earning an annually
compounded interest rate of 6 percent. Approximately how many years will it take before
Indy's investment is worth $5000?
26. (Advanced analysis) Susie has $500 invested in a financial asset earning an annually
compounded interest rate of 8 percent. If Susie plans to cash in the asset when it is worth
$700, about how long will she have to wait?
Chapter 17 - Financial Economics
27. (Advanced analysis) Tani invests $100 in a financial asset earning an annually
compounded interest rate of 5 percent. In about how many years will her investment be worth
$150?
28. What concept describes how quickly an investment increases in value when interest is
paid not only on the original amount invested, but also on the accumulated interest
payments?
29. Which of the following equations shows how much X dollars will be worth if invested at
an annual interest rate i for t years, if interest is compounded annually?
Chapter 17 - Financial Economics
30. If i is the interest rate and X is the number of dollars to be received after t years, the
formula to calculate the present value of a future payment is:
31. The formula for present value allows investors to:
32. The price of an asset should:
Chapter 17 - Financial Economics
33. The present value of a future amount of money will be greater the:
34. The present value of a future amount of money will be greater the:
35. Suppose that Clint wins the lottery jackpot of $300 million. He can receive it over the next
30 years in annual payments of $10 million, or receive a lump sum of $100 million
immediately. Assuming that taxes are not a consideration, should Clint take his winnings as a
lump sum?
Chapter 17 - Financial Economics
36. Lottery winners who take the lump sum payouts instead of payments spread out over
many years:
37. Professional athletes attempting only to maximize income will defer larger salaries if:
38. The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a 2-year
contract, but because of salary cap limitations can only pay $8 million for the first year
(Alex's market value is $10 million per year). The Hazards offer to pay $8 million in year 1,
and $13 million in year 2. Should Alex sign the contract?
Chapter 17 - Financial Economics
39. Which of the following is not common to all investments?
40. Which of the following is common to all investments?
41. Ownership of a single corporation is represented by what investment?
Chapter 17 - Financial Economics
42. A stockholder owning 5 percent of a company's stock:
43. The maximum amount of money that company shareholders can lose on their investment
in the corporation is:
44. If a corporation goes bankrupt:
Chapter 17 - Financial Economics
45. Limited liability rules:
46. Payments to shareholders from corporate profits are known as:
47. When shares of stock are sold for more than they are purchased, the difference received
by the seller is referred to as:
Chapter 17 - Financial Economics
48. Owners of stock can receive ___________ from their shares; sellers of stock can receive
___________ from selling their shares.
49. The current share price of a corporation's stock is determined by the:
Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.
Every year he has received, from company profits, $1 for each share he owns.
50. Refer to the information above. If Indy sells all his shares at a price of $30 per share, he
will receive a:
Chapter 17 - Financial Economics
51. Refer to the information above. If Indy holds his shares for 5 years, he:
52. Indy should necessarily sell his stock if:
53. Bonds represent:
Chapter 17 - Financial Economics
54. Debt contracts (also called instruments) issued by government and corporations are known
as:
55. Which of the following is a difference between stocks and bonds?
56. Which of the following is a difference between stocks and bonds?
Chapter 17 - Financial Economics
57. Which of the following is a difference between stocks and bonds?
58. Les buys a bond for $5,000. Every year that he holds the bond he we will receive interest
payments of $250. The interest rate on the bond:
59. Lee buys a bond for $10,000 and receives interest payments of $400 every six months.
The interest rate on the bond is approximately:
