Question 1

The present value of a future amount of money will be greater the

Accepted Answer

A)  greater the interest rate.
B)  greater the amount of time before the future payment is received.
C)  lower the interest rate.
D)  greater the rate of the expected rate of inflation.

Question 2

Refer to the graph.Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a financial asset?

Accepted Answer

A)  line A
B)  line B
C)  line C
D)  none of these

Question 3

The Federal Reserve changes the risk-free interest rate most directly

Accepted Answer

A)  by changing the reserve requirement.
B)  by changing the federal funds rate.
C)  by changing the discount rate.
D)  with open-market operations.

Question 4

Mutual fund managers tend to focus solely on the

Accepted Answer

A)  short-term (quarterly)  performance of the corporations whose securities they invest in.
B)  long-term performance of the corporations whose securities they invest in.
C)  assets of the corporations whose securities they invest in.
D)  liabilities of the corporations whose securities they invest in.

Question 5

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Accepted Answer

A)  stock A to fall and/or the price of stock B to rise.
B)  stock A to rise and/or the price of stock B to fall.
C)  both stocks to rise or fall together.
D)  neither stock to change.

Question 6

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.Indy should necessarily sell his stock if

Accepted Answer

A)  the price falls below $20 per share.
B)  he expects the sum of future capital gains and dividends to be negative.
C)  the company stops paying dividends.
D)  any of these circumstances occur.

Question 7

Which of the following is a difference between stocks and bonds?

Accepted Answer

A)  Bonds may be issued by corporations or government; stock is only issued by corporations.
B)  Stock may be issued by corporations or government; bonds are only issued by corporations.
C)  Bonds are only issued by government; stock is only issued by corporations.
D)  There is no difference in terms of who issues stocks and bonds.

Question 8

The current share price of a corporation's stock is determined by the

Accepted Answer

A)  original purchase price multiplied by 1 plus the interest rate.
B)  present value of capital gains and dividends received by stock owners.
C)  expected interest and dividend payments.
D)  expected capital gains and dividends prospective buyers will earn.

Question 9

The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the

Accepted Answer

A)  Beta Line.
B)  Security Market Line.
C)  Risk Premium Line.
D)  Risk-Return Line.

Question 10

Which of the following statements about stocks and bonds is true?

Accepted Answer

A)  Stocks pay interest, while bonds pay dividends.
B)  One can lose with stocks but not with bonds.
C)  The U.S.Federal government issues bonds but not stocks.
D)  Bonds are long-term, while stocks are short-term investments.

Question 11

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S.government bonds, then, as a consequence, asset prices

Accepted Answer

A)  increase and the average expected rate of return on assets decreases.
B)  decrease and the average expected rate of return on assets increases.
C)  increase and the average expected rate of return on assets increases.
D)  decrease and the average expected rate of return on assets decreases.

Question 12

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

Accepted Answer

A)  (1 + i) tX.
B)  X/(1 + i) t. 
C)   it/(1 + X) .
D)  (X/i) t.

Question 13

Matt, 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 dollars) ?

Accepted Answer

A)  $22.5 million
B)  $23.0 million
C)  $24.0 million
D)  $25.2 million

Question 14

A bond that pays annual interest (or coupons)  and a face value at maturity will fetch a price today that is equal to the

Accepted Answer

A)  future value of its annual coupons and face value.
B)  future value of its annual coupons minus its face value.
C)  present value of its annual coupons and face value.
D)  present value of its annual coupons minus its face vale.

Question 15

Short-term U.S.government bonds are considered to be risk-free.

Accepted Answer

A) True 
 B)False

Question 16

Investors diversify portfolios

Accepted Answer

A)  because diversified portfolios pay the highest rates of return.
B)  because diversified portfolios are guaranteed not to lose money.
C)  to reduce the risk of losing their investment.
D)  to guarantee minimum returns on their investment.

Question 17

Bonds represent

Accepted Answer

A)  a claim on company dividends.
B)  ownership of a company.
C)  all financial assets guaranteed to pay interest.
D)  loans to governments and corporations.

Question 18

Which of the following financial assets is considered to be essentially risk-free?

Accepted Answer

A)  gold
B)  stock in Fortune 500 companies
C)  real estate
D)  short-term U.S.government bonds

Question 19

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

Accepted Answer

A)  10 percent.
B)  20 percent.
C)  25 percent.
D)  30 percent.

Question 20

The Security Market Line (SML)  is upward-sloping, indicating that the

Accepted Answer

A)  beta of an investment increases as its risk level increases.
B)  average expected return on investments decreases as their risk level decreases.
C)  average expected return on the risk-free asset increases as its beta increases.
D)  average expected return of the market portfolio increases as its beta increases.

Exam 17: C: Financial Economics

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Correct Answer
verified

The present value of a future amount of money will be greater the

Correct Answer
verified

The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the

Correct Answer
verified

Short-term U.S.government bonds are considered to be risk-free.

Correct Answer
verified

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Correct Answer
verified

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

Correct Answer
verified

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S.government bonds, then, as a consequence, asset prices

Correct Answer
verified

The Federal Reserve changes the risk-free interest rate most directly

Correct Answer
verified

Refer to the graph.Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a financial asset?

Correct Answer
verified

Correct Answer
verified

Which of the following financial assets is considered to be essentially risk-free?

Correct Answer
verified

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

Correct Answer
verified

Mutual fund managers tend to focus solely on the

Correct Answer
verified

The Security Market Line (SML) is upward-sloping, indicating that the

Correct Answer
verified

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.Indy should necessarily sell his stock if

Correct Answer
verified

Which of the following statements about stocks and bonds is true?

Correct Answer
verified

The current share price of a corporation's stock is determined by the

Correct Answer
verified

Bonds represent

Correct Answer
verified

Investors diversify portfolios

Correct Answer
verified

Which of the following is a difference between stocks and bonds?

Correct Answer
verified

Exam 17: C: Financial Economics

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Correct AnswerverifiedShow Answer

The present value of a future amount of money will be greater the

Correct AnswerverifiedShow Answer

The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the

Correct AnswerverifiedShow Answer

Short-term U.S.government bonds are considered to be risk-free.

Correct AnswerverifiedShow Answer

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Correct AnswerverifiedShow Answer

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

Correct AnswerverifiedShow Answer

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S.government bonds, then, as a consequence, asset prices

Correct AnswerverifiedShow Answer

The Federal Reserve changes the risk-free interest rate most directly

Correct AnswerverifiedShow Answer

Refer to the graph.Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a financial asset?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following financial assets is considered to be essentially risk-free?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Mutual fund managers tend to focus solely on the

Correct AnswerverifiedShow Answer

The Security Market Line (SML) is upward-sloping, indicating that the

Correct AnswerverifiedShow Answer

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.Indy should necessarily sell his stock if

Correct AnswerverifiedShow Answer

Which of the following statements about stocks and bonds is true?

Correct AnswerverifiedShow Answer

The current share price of a corporation's stock is determined by the

Correct AnswerverifiedShow Answer

Bonds represent

Correct AnswerverifiedShow Answer

Investors diversify portfolios

Correct AnswerverifiedShow Answer

Which of the following is a difference between stocks and bonds?

Correct AnswerverifiedShow Answer

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