Assignment 5

Which compounding interval will result in the lowest future value assuming everything else is held constant? Annual Continuous Daily Quarterly

Annual

How frequently does continuous compounding occur? 1,000 times a year 1,000,000 times a year Every instant 100 times a year

Every instant

True or false: There is only one way to quote interest rates.

False

Which of the following payment methods amortizes a loan? Fixed payments that result in a zero loan balance Interest plus fixed amount Fixed interest payments only Single lump sum payment

Fixed payments that result in a zero loan balance Interest plus fixed amount

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year. subtracting adding discounting compounding

compounding

With a fixed payment loan, the amount of interest paid (decreases/increases) each period.

decreases

To use a present value of an annuity table to find the present value of an annuity factor, search the ______ for the number of periods and the ______ for the rate. diagonal; column row; column column; row row; diagonal

diagonal; column row; column

The loan balance on partial amortization loans declines so slowly because the ___. interest rate rises over the years payments are mostly principal payments are mostly interest yearly payment rises steadily over the years

payments are mostly interest

he effective annual rate (EAR) takes into account the ______ of interest that occurs within a year. adding discounting subtracting compounding

compounding

The future value of $100 at 10 percent compounded semiannually is ______ the future value of $100 at 10 percent compounded annually. greater than less than equal to

greater than

f the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity. greater than equal to less than

greater than

Interest paid twice a year is known as ______ compounding. semiannual biannual monthly weekly

semiannual

Which of the following processes can be used to calculate future value for multiple cash flows? Discount all of the cash flows back to Year 0 Find the future value of a single lump sum amount Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up

Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up

True or false: The APR is always the same as the EAR.

False

_____ loans are short-term loans made to consumers which require you to write a check today that is postdated. Mortgage Spiked Reverse Payday

Payday

True or false: A fixed payment loan is most common for consumers.

True

When calculating the present value of multiple cash flows using a spreadsheet, you must: use the time value of money tables to calculate the present value of each cash flow calculate the future value of each cash flow then add the compounded values together calculate the present value of each cash flow then add the discounted values together

calculate the present value of each cash flow then add the discounted values together

One example of a perpetuity is a British _____. consol pound solace royal flush

consol

In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the (beginning/end) of each period.

end

Assuming the same interest rate, the future value of an amount compounded semiannually is ______ the future value of that amount compounded annually. less than equal to twice as much as greater than

greater than

Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is: more. less. the same.

less.

A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time. level random uneven infinite

level

When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum. inflated reduced lump stair-step

lump

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate. annuity growing annuity perpetuity growing perpetuity

perpetuity

Amortization is the process of paying off loans by regularly reducing the _________. life of the loan payment frequency principal interest rate

principal

An effective annual rate of 7.12 percent is equal to 7 percent compounded ______. continuously semiannually daily quarterly

semiannually

The APR is also called the Blank______ rate and it differs from the EAR. inflated reversed stated average

stated

Semiannual compounding means that interest is paid ______ per year. two times one time three times twelve times

two times

Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year? $397.66 $412.98 $405.63 $402.11

$402.11

Which of the following is equal to an effective annual rate of 12.36 percent? 12%, compounded annually 12%, compounded semiannually 12%, compounded monthly 12%, compounded quarterly

12%, compounded semiannually

To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ______ and multiply that by ______. 4.3553; 10 7.7217; $100 3.7908; $100 3.1699; 10

3.7908; $100

____ is the process of paying off loans by regularly reducing the principal.

Amortized

You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, which of the following show the steps you will apply using a financial calculator to solve for the number of months will it take to pay off your credit card? Enter −50 for PMT, 1,200 for PV, and 5 for I/Y. Solve for N. Enter −50 for PMT, 1,200 for PV, and 1.5 for I/Y. Solve for N. Enter −1,500 for PMT, 1200 for PV, and 1.5 for I/Y. Solve for N. Enter −1,200 for PMT, 50 for PV, and 1.5 for I/Y. Solve for N.

Enter −50 for PMT, 1,200 for PV, and 1.5 for I/Y. Solve for N.

Which type of amortization is most commonly used in the real world for mortgages and car loans? Fixed principal Fixed interest Fixed payment Variable period

Fixed payment

Which of the following show the inputs you would use in a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%? In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV. In your financial calculator, enter 100 for PMT, 5 for N, and 30 for I/Y. Solve for PV. In your financial calculator, enter 5 for PMT, 30 for N, and 5 for I/Y. Solve for PV.

In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV.

Which of the following are annuities? Monthly grocery bill Installment loan payments Monthly rent payments in a lease Tips to a waiter

Installment loan payments Monthly rent payments in a lease

Which of the following are ways to amortize a loan? Pay principal and interest every period in a fixed payment. Pay both interest and principal in one lump sum at maturity Pay the interest each period plus some fixed amount of the principal. Pay only interest every period and pay the principal off at maturity

Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal.

annual percentage rate (APR)

The interest rate charged per period multiplied by the number of periods per year.

effective annual rate (EAR)

The interest rate expressed as if it were compounded once per year.

When using a financial calculator to find the interest rate, you may use the inputs N, PMT, and PV to find I/____.

Y

Which of the following is the formula for the EAR? [1/(Quoted rate/m)]^m − 1 (Quoted rate/m)^m − 1 [1 + (Quoted rate/m)]^m − 1

[1 + (Quoted rate/m)]^m − 1

When calculating the future value of multiple cash flows using a spreadsheet, you must: calculate the future value of each cash flow then add the compounded values together. calculate the present value of each cash flow then add the discounted values together. use the time value of money tables to calculate the future value of each cash flow.

calculate the future value of each cash flow then add the compounded values together.

The name for a perpetuity in Canada and the United Kingdom is a ____.

consol

An annuity ____ is an annuity for which the cash flows occur at the beginning of each period.

due

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually. effective stated nominal implicit

effective

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually. implicit stated effective nominal

effective

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually. nominal effective stated implicit

effective

The present value of a series of future cash flows is the amount you would need today to _____. break-even on the given exchange rate make the future cash flows equal to zero exactly half those future cash flows exactly duplicate those future cash flows

exactly duplicate those future cash flows

A single cash flow is also known as a: multiple cash flow terminal cash flow level cash flow lump sum

lump sum

Most investments involve _____ cash flows. no single lump sum multiple

multiple

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. three years two years half a year one year

one year

A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) for many years.

outflow; inflow

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then: amortized just like the first part. forgiven by the lender. amortized over the remaining loan period. paid off in a lump sum bullet payment.

paid off in a lump sum bullet payment.

The loan balance on ____ amortization loans declines so slowly because the payments are mostly interest.

partial

When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the ______ as a negative value. interest rate payment number of periods type of annuity

payment

C/r is the formula for the present value of a(n) ____. growing annuity growing perpetuity perpetuity annuity

perpetuity

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate. perpetuity growing annuity annuity growing perpetuity

perpetuity

The original loan amount is called the _____. interest only principal amortization fixed repayment

principal

Because of __________ and _________, interest rates are often quoted in many different ways. mathematics; evolution tradition; legislation religion; randomness

tradition; legislation

If the interest rate is greater than ____, the value of an annuity due is always greater than an ordinary annuity.

zero

You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%? $5,000 × 1.03 $5,000/1.03 $5,000/1.03^2

$5,000/1.03

The formula for the present value of an annuity due is _____. (1 + r) + (PV of an ordinary annuity) (1 + r) × (PV of an ordinary annuity) (PV of an ordinary annuity)/(1 + r) (PV of an ordinary annuity) - (1 + r)

(1 + r) × (PV of an ordinary annuity)

Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year? =PV(.10,10,100,0,) =PV(10,-100,.1,0,) =PV(.10,10,-100,0,) =PV(100,.1,0,10,)

=PV(.10,10,-100,0,)

Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year? =PV(100,.1,0,10,) =PV(.10,10,-100,0,) =PV(10,-100,.1,0,) =PV(.10,10,100,0,)

=PV(.10,10,-100,0,)

Which of the following is a perpetuity? An undulating stream of cash flows forever A constant stream of cash flows forever A growing stream of cash flows for a fixed period A constant stream of cash flows for a fixed period

A constant stream of cash flows forever

Which of the following is the simplest form of loan? An amortized loan A partially amortized loan A pure discount loan An interest-only loan

A pure discount loan

Which of the following is the simplest form of loan? An interest-only loan An amortized loan A pure discount loan A partially amortized loan

A pure discount loan

Another common term for the effective annual rate (EAR) is the: APY APR YTM SAIR

APY

Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $100 per year for 10 years at 15%? Enter 100 for PMT, 10 for N, and 5 for I/Y. Solve for FV. Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV. Enter 100 for N, 10 for PMT, and 15 for I/Y. Solve for FV.

Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV.

Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%? Enter 400 for N, 10 for PMT, and 5 for I/Y. Solve for FV. Enter 100 for PMT, 10 for N, and 5 for I/Y. Solve for FV. Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.

Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.

You may use which of the following sets of inputs together to solve for the present value of an annuity using a financial calculator? RATE, PV, NPV, I/Y N, NPER, PMT, PV N, I/Y, PMT, PV N, I/Y, RATE, PV

N, I/Y, PMT, PV

Which of the following are real-world examples of annuities? Common stock dividends Pensions Mortgages

Pensions Mortgages

Which of the following is true about a growing annuity? The cash flows grow for an infinite period. The cash flows grow at an irregular rate. The cash flows grow for a finite period. The cash flows grow at a constant rate.

The cash flows grow for a finite period. The cash flows grow at a constant rate.

Which of the following are true about the amortization of a fixed payment loan? The principal amount paid increases each period. The amount of interest and principal paid increases each period. The payment amount decreases each period. The amount of interest paid decreases each period.

The principal amount paid increases each period. The amount of interest paid decreases each period.

In the Excel setup of a loan amortization problem, which of the following occurs? To find the new balance, you subtract the interest payment from the old balance. To find the principal payment each month, you subtract the interest payment from the total payment. To find the dollar interest each month, you multiply the balance times the yearly interest rate. The payment is found using PMT(rate, nper,-pv, fv).

To find the principal payment each month, you subtract the interest payment from the total payment. The payment is found using PMT(rate, nper,-pv, fv).

The ____ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.

annual

The future value factor for a(n) ____ is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.

annuity

An annuity due is a series of payments that are made ____. 1 year hence 1 year in the past any time in the future at the beginning of each period

at the beginning of each period

lump sum payment to pay off the balance of a partially amortized loan is called a ______, payment. bullet or shell balloon or bullet balloon, or bucket pistol and bullet

balloon or bullet

Payday loans allow you to ___. borrow on paydays only pay back part of the loan every payday pay back the loans only on paydays borrow now and repay later

borrow now and repay later

A growing annuity has a(n) ____. infinite number of constant cash flows finite number of growing cash flows infinite number of growing cash flows finite number of level cash flows

finite number of growing cash flows

The present value of a series of ____ cash flows is the amount you would need today to exactly duplicate those future cash flows.

future

A perpetuity is a constant stream of cash flows for a(n) ______ period of time. undetermined infinite random finite

infinite

For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always (smaller/larger) than the APR.

larger

For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ______ the APR. larger than smaller than equal to

larger than

The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r). deferred actuarial ordinary middle

ordinary

The payments in a Blank______ amortization loan are NOT based on the life of the loan. remunerative federal full partial

partial

Versus a similar fixed payment loan, the total interest on a fixed ____ loan is less.

principal

The _____ rate is used to find the EAR. quoted inverted interest discount yield inflation

quoted

With interest-only loans that are not perpetuities, the entire principal is _____. repaid at some point in the future repaid before any interest payments are made never repaid

repaid at some point in the future

The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow. annuity consol uneven perpetuity

uneven

Another common name for the effective annual rate is the annual percentage ______. investment yield owed retreat

yield

Which of the following should be valued using a perpetuity formula? Cash flows from a product whose sales are expected to remain constant forever Preferred stock A consol (bond that pays interest only and does not mature) An amortized loan with a set amount over a period of time

Cash flows from a product whose sales are expected to remain constant forever Preferred stock A consol (bond that pays interest only and does not mature)

You are planning to buy a CD for $1,352. You will receive $1,500 in 2 years. Which inputs will you use in a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding? Enter −1,352 for PV, 10 for N, and 1,500 for FV. Solve for I/Y. Enter −1,500 for PV, 2 for N, and 1,352 for FV. Solve for I/Y. Enter −1,000 for PV, 2 for N, and 1,500 for FV. Solve for I/Y. Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.

Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.