Question 1

The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversifiable risk of financial assets.

Accepted Answer

A) True 
 B)False

Question 2

Equal shares of a firm's profit are paid out to stockholders as

Accepted Answer

A)  interest.
B)  dividends.
C)  capital gains.
D)  net earnings.

Question 3

Xavier is a baseball player negotiating a contract to play for a team for one year. He is usually paid $10 million a year for playing, but the salary cap 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 should that remaining amount be next year?

Accepted Answer

A)  $5.0 million
B)  $5.1 million
C)  $5.4 million
D)  $6.1 million

Question 4

When a company declares bankruptcy, stockholders are the first to be paid when company assets are sold.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is an economic investment?

Accepted Answer

A)  shares of corporate stock
B)  U.S.savings bonds
C)  newly built houses
D)  bonds issued by private corporations

Question 6

Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500.If the price of the bond were to fall to $9,000,

Accepted Answer

A)  the bond's rate of return would rise from 5 percent to 5.6 percent.
B)  the bond payments would fall to $450 per year.
C)  Pavel should definitely buy the bond because the price is lower.
D)  Pavel should definitely not buy the bond because the lower price means it is worth less.

Question 7

Which one of the following would best describe a mutual fund?

Accepted Answer

A)  an investment that is available at many banks and is FDIC insured
B)  a company that manages a portfolio that is purchased by pooling the money of its investors
C)  a debt contract that is issued by a company and offers interest payment on the loan
D)  ownership of shares in a corporation with no guarantee the company will be profitable

Question 8

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

Accepted Answer

A)  25 percent.
B)  33 percent.
C)  50 percent.
D)  67 percent.

Question 9

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Accepted Answer

A)  Less risky assets will have similar average expected rates of return to more risky assets.
B)  Less risky assets will have higher average expected rates of return than more risky assets.
C)  More risky assets will have higher average expected rates of return than less risky assets.
D)  More risky assets will have lower average expected rates of return than less risky assets.

Question 10

A bank account pays 4 percent 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?

Accepted Answer

A)  $3,122
B)  $3,246
C)  $3,600
D)  $4,206

Question 11

The maximum amount of money that company shareholders can lose on their investment in the corporation is

Accepted Answer

A)  whatever percentage of their wealth equals their percentage of ownership.
B)  whatever they paid for the shares in the company.
C)  whatever the corporation loses each year times the percentage of ownership in the company.
D)  zero.

Question 12

Short-term U.S.government securities are practically risk-free, and thus their rates of return are payments solely for

Accepted Answer

A)  diversifiable risk.
B)  time preference.
C)  idiosyncratic risk.
D)  pure profit.

Question 13

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.If Indy sells all his shares at a price of $30 per share, he will receive a

Accepted Answer

A)  total capital gain of $10.
B)  dividend of $10 per share.
C)  total capital gain of $1,000.
D)  capital gain of $30 per share.

Question 14

The formula for present value allows investors to

Accepted Answer

A)  convert a given number of dollars in the future into its present equivalent.
B)  determine the future impact of inflation on a present amount of money.
C)  know which financial assets will provide the greatest future returns.
D)  do all of these.

Question 15

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

Accepted Answer

A)  diversification.
B)  arbitrage.
C)  hedging.
D)  securitization.

Question 16

A bond that pays no annual interest (or coupons)  and has a face value at maturity will fetch a price today that is equal to the

Accepted Answer

A)  future value of its face value.
B)  number of years in the life of the bond times its face value.
C)  present value of the number of years in the life of the bond times its face value.
D)  present value of its face value.

Question 17

(Advanced analysis)  Indy has $2,000 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 $5,000?

Accepted Answer

A)  25
B)  10.5
C)  12.8
D)  15.7

Question 18

The terms "economic investment" and "financial investment" can be used synonymously.

Accepted Answer

A) True 
 B)False

Question 19

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

Accepted Answer

A)  not affect their rates of return.
B)  increase the return on the asset with the higher rate of return as the demand for it increases.
C)  increase the gap between the two rates of return.
D)  eventually equalize their rates of return.

Question 20

According to The International Country Risk Guide, financial assets in

Accepted Answer

A)  low-income economies tend to be less risky than in high-income economies.
B)  low-income economies tend to be riskier than in high-income economies.
C)  low-income economies tend to be about the same level of risk as in high-income economies.
D)  all countries carry about the same level of risk.

Exam 17: C: Financial Economics

When a company declares bankruptcy, stockholders are the first to be paid when company assets are sold.

Correct Answer
verified

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Correct Answer
verified

According to The International Country Risk Guide, financial assets in

Correct Answer
verified

Correct Answer
verified

Which of the following is an economic investment?

Correct Answer
verified

A bond that pays no annual interest (or coupons) and has a face value at maturity will fetch a price today that is equal to the

Correct Answer
verified

A bank account pays 4 percent 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?

Correct Answer
verified

The maximum amount of money that company shareholders can lose on their investment in the corporation is

Correct Answer
verified

Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500.If the price of the bond were to fall to $9,000,

Correct Answer
verified

The terms "economic investment" and "financial investment" can be used synonymously.

Correct Answer
verified

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

Correct Answer
verified

Short-term U.S.government securities are practically risk-free, and thus their rates of return are payments solely for

Correct Answer
verified

The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversifiable risk of financial assets.

Correct Answer
verified

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

Correct Answer
verified

Which one of the following would best describe a mutual fund?

Correct Answer
verified

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

Correct Answer
verified

The formula for present value allows investors to

Correct Answer
verified

Equal shares of a firm's profit are paid out to stockholders as

Correct Answer
verified

(Advanced analysis) Indy has $2,000 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 $5,000?

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.If Indy sells all his shares at a price of $30 per share, he will receive a

Correct Answer
verified

Exam 17: C: Financial Economics

When a company declares bankruptcy, stockholders are the first to be paid when company assets are sold.

Correct AnswerverifiedShow Answer

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Correct AnswerverifiedShow Answer

According to The International Country Risk Guide, financial assets in

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is an economic investment?

Correct AnswerverifiedShow Answer

A bond that pays no annual interest (or coupons) and has a face value at maturity will fetch a price today that is equal to the

Correct AnswerverifiedShow Answer

A bank account pays 4 percent 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?

Correct AnswerverifiedShow Answer

The maximum amount of money that company shareholders can lose on their investment in the corporation is

Correct AnswerverifiedShow Answer

Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500.If the price of the bond were to fall to $9,000,

Correct AnswerverifiedShow Answer

The terms "economic investment" and "financial investment" can be used synonymously.

Correct AnswerverifiedShow Answer

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

Correct AnswerverifiedShow Answer

Short-term U.S.government securities are practically risk-free, and thus their rates of return are payments solely for

Correct AnswerverifiedShow Answer

The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversifiable risk of financial assets.

Correct AnswerverifiedShow Answer

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

Correct AnswerverifiedShow Answer

Which one of the following would best describe a mutual fund?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The formula for present value allows investors to

Correct AnswerverifiedShow Answer

Equal shares of a firm's profit are paid out to stockholders as

Correct AnswerverifiedShow Answer

(Advanced analysis) Indy has $2,000 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 $5,000?

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.If Indy sells all his shares at a price of $30 per share, he will receive a

Correct AnswerverifiedShow Answer

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