Question 1

Which of the following statements best reflects the concept of present value?

Accepted Answer

A)  "The savings bond I bought five years ago is now worth $1,000."
B)  "My $100 savings bond will be worth $200 in 10 years."
C)  "You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now."
D)  "The $5,000 in my savings account is worth less today than five years ago because of inflation."

Question 2

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

Accepted Answer

A)  10.5 percent.
B)  11.0 percent.
C)  11.5 percent.
D)  12.5 percent.

Question 3

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

Accepted Answer

A)  beta.
B)  risk.
C)  arbitrage.
D)  diversification.

Question 4

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Accepted Answer

A) True 
 B)False

Question 5

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Accepted Answer

A) True 
 B)False

Question 6

The vertical intercept of the Security Market Line (SML)  shows the

Accepted Answer

A)  amount of arbitrage.
B)  risk-free interest rate.
C)  beta of the market portfolio.
D)  risk premium for the market portfolio.

Question 7

The current price of an asset is equal to the future value of its expected returns or income streams.

Accepted Answer

A) True 
 B)False

Question 8

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 9

If the Fed raises the interest rates on short-term U.S.government bonds, then the Security Market Line shifts

Accepted Answer

A)  downward as the risk-free interest rate increases.
B)  downward as the risk-free interest rate decreases.
C)  upward as the risk-free interest rate increases.
D)  upward as the risk-free interest rate decreases.

Question 10

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Accepted Answer

A) True 
 B)False

Question 11

Other factors constant, the future value will be smaller,

Accepted Answer

A)  the larger is its present value.
B)  the higher is the interest rate.
C)  the shorter is the time period t.
D)  the larger is the number of periods.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

The idea that money has "time value" refers to the fact that

Accepted Answer

A)  people prefer to receive a given sum of money in the future rather than in the present.
B)  money can be used to purchase the services of labor, as measured in hourly units.
C)  a specific amount of money is more valuable to a person the sooner it is received.
D)  compound interest converts future dollars into a greater amount of current dollars.

Question 14

The so-called risk-free rate essentially measures the investors'

Accepted Answer

A)  risk aversion.
B)  riskpreference.
C)  time preference.
D)  expected rate of return.

Question 15

The beta for the market portfolio's level of nondiversifiable risk is

Accepted Answer

A)  zero.
B)  1.
C)  100.
D)  always fluctuating.

Question 16

What are the two most important factors influencing investor preferences?

Accepted Answer

A)  the desire for high rates of return and the thrill of uncertainty
B)  the desire for high rates of return and dislike of risk and uncertainty
C)  an equal balance between stocks and bonds, and high rates of return
D)  stable rates of return and balance between private and public sector financial assets

Question 17

Which one of the following is a feature of all investments?

Accepted Answer

A)  They provide regular interest payments.
B)  They are typically long term.
C)  They have minimal risk for future payments to be made.
D)  They give owners a chance to receive future payments.

Question 18

The vertical intercept of the Security Market Line is determined by the

Accepted Answer

A)  beta of the market portfolio.
B)  discount rate.
C)  risk-free interest rate.
D)  risk premium.

Question 19

Risk in finance means

Accepted Answer

A)  mostly positive outcomes.
B)  mostly negative outcomes.
C)  either positive or negative outcomes.
D)  the same thing as risk in health science.

Question 20

In general, risk levels and average expected rates of return are

Accepted Answer

A)  not related.
B)  inversely related.
C)  directly related.
D)  as often inversely related as they are directly related.

Exam 37: Financial Economics

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

In general, risk levels and average expected rates of return are

Correct AnswerverifiedShow Answer

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Correct AnswerverifiedShow Answer

Which one of the following is a feature of all investments?

Correct AnswerverifiedShow Answer

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Correct AnswerverifiedShow Answer

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If the Fed raises the interest rates on short-term U.S.government bonds, then the Security Market Line shifts

Correct AnswerverifiedShow Answer

The vertical intercept of the Security Market Line (SML) shows the

Correct AnswerverifiedShow Answer

The so-called risk-free rate essentially measures the investors'

Correct AnswerverifiedShow Answer

The vertical intercept of the Security Market Line is determined by the

Correct AnswerverifiedShow Answer

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

Correct AnswerverifiedShow Answer

The beta for the market portfolio's level of nondiversifiable risk is

Correct AnswerverifiedShow Answer

Risk in finance means

Correct AnswerverifiedShow Answer

What are the two most important factors influencing investor preferences?

Correct AnswerverifiedShow Answer

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Correct AnswerverifiedShow Answer

The idea that money has "time value" refers to the fact that

Correct AnswerverifiedShow Answer

Other factors constant, the future value will be smaller,

Correct AnswerverifiedShow Answer

The current price of an asset is equal to the future value of its expected returns or income streams.

Correct AnswerverifiedShow Answer

Which of the following statements best reflects the concept of present value?

Correct AnswerverifiedShow Answer

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