Finance 2

Question 1

Which of the following describes the “invisible hand”

Answer 1

The free market, guided by self-interest, ensures the sufficient production of goods to meet society’s demands

Question 2

What problems does the prospect theory solve?

Answer 2

1. People can underestimate high probabilities and overestimate low probabilities
2. People do not treat gambles as equivalent to their expected utility

Question 3

What is wishful thinking bias?

Answer 3

People over-estimate probabilities of things they would like to be true

Question 4

Ricardo thinks that, since society seems similar to what it was in the late 1920s, a second great depression is coming soon. To which cognitive bias is Ricardo falling victim?

Answer 4

Representativeness heuristic

Question 5

What is Newcomb’s paradox?

Answer 5

People sometimes change their behavior when they learn about a prediction which has been made about the future

Question 6

Which of the following is NOT a common trait of somebody with antisocial personality disorder?

Answer 6

Lack of desire to interact with others

Question 7

• Which of the following describes current short-term interest rates

Answer 7

They are approximately equal to zero

Question 8

What is the Federal Funds Rates and how long does it take to mature

Answer 8

The shortest-term interest rate in the federal government, which takes one day to mature

Question 9

If you put $1000 into an account with a 20% interest rate, how much money will you have at the end of the year if interest is compounded ONCE per year

Question 10

How do coupon bonds work

Answer 10

You purchase a bond for the same price you eventually sell it for, but while it reaches maturity, you may clip “coupons” off the bond and exchange them for money

Question 11

what is the main difference between a consol and an annuity

Answer 11

A consol pays a constant(coupon) forever, whereas the annuity also pays a constant quantity but only until a fixed time T called the maturity date

Question 12

A forward rate is

Answer 12

The expected rate(yield) on a bond several months or years from now

Question 13

The real interest rate is calculated by

Answer 13

subtracting the inflation rate from the nominal interest rate

Question 14

Irving Fisher’s Debt Deflation Theory starts from the observation that

Answer 14

Deflation redistributed real wealth from debtors to creditors