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


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.

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The Standard & Poor's 500 Index measures prices of the 500


A) most purchased consumer goods in the United States.
B) stocks of the largest companies in the United States.
C) largest bonds trading in the United States.
D) largest index funds trading in the United States.

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Arbitrage equalizes rates of return across assets of a given beta.

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

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Bankruptcy of a firm means that it


A) earned less revenues than its total costs.
B) cannot meet its contractual obligations to its stockholders.
C) has a lot of debt owed to its bondholders.
D) is unable to make timely promised payments on its debt.

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Index funds are a portfolio of


A) bonds with rates of return fixed at 2 percentage points above the rate of inflation.
B) mutual funds that track different indexes.
C) stocks or bonds that exactly match a particular index.
D) stocks guaranteed rates of return in excess of growth in the GDP price index.

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Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond


A) is $110.
B) is $125.
C) is $140.
D) depends on rates of return she could earn on other, similar investments.

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Arbitrage causes all financial assets


A) of the same risk level to have the same price.
B) to have the same expected rate of return.
C) to have the same beta.
D) of the same risk level to have the same average expected rate of return.

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The fact that people prefer to consume in the present rather than the future is referred to as time preference.

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The average expected rate of return on most financial assets is the sum of the rates that compensate for


A) nondiversifiable risk and time preference.
B) diversifiable risk and time preference.
C) nondiversifiable and diversifiable risk.
D) nondiversifiable and diversifiable risk, and time preference.

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


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

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What does the "beta" of an asset measure?


A) how the nondiversifiable risk compares with diversifiable risk for an asset
B) how the expected return compares with the diversifiable risk of a given asset
C) how the expected return compares with the nondiversifiable risk of the market portfolio
D) how the nondiversifiable risk of a given asset compares with that of the market portfolio

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Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.


A) $2,480
B) $2,524.95
C) $1,584.19
D) $1,520

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Risk in financial economics refers mainly to the chance that an investment could lose value.

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The Fed can regularly influence and change the risk-free rate of financial investments through its


A) open-market operations.
B) quantitative easing.
C) required reserve ratio.
D) bank supervision.

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A stock investor may expect returns in the form of


A) present and future values.
B) interest and dividends.
C) interest and capital gains.
D) dividends and capital gains.

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The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a two-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?


A) Yes, Alex is better off financially regardless of the interest rate.
B) Yes, if the interest rate is less than 50 percent.
C) Yes, but only if the team expects to be successful.
D) Yes, but only if the interest rate is less than 10 percent.

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Other factors constant, if the interest rate is higher, the present value of a certain future amount will be smaller.

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If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

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


A) Bonds represent ownership; stocks represent debt.
B) Bonds make interest payments; stocks pay dividends.
C) Stock payouts are predictable; bond payouts are not.
D) All of these are differences between stocks and bonds.

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