business finance ch 5

To find the present value of an annuity of $100 per year for 10 years at 10% per year using the tables, find a present value factor of 6.1446 and multiply it by ______.

$100

Which of the following processes can be used to calculate the future value of multiple cash flows?

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

Which of the following are ways to amortize a loan?

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

When calculating annuity present values using a financial calculator, the _________ amount is left blank. (Enter the abbreviation only.)

FV

The entire principal of an interest-only loan is the:

original loan amount

True or false: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.

true

True or false: Interest rates can be quoted in various ways.

true

True or false: The annuity present value of an amount C is calculated as C multiplied by (1-[1/(1+r)t])/r

true

True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.

false. the annuity due calculation assumes cash flows occur at the beginning of the period

A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with________ -term business loans.

medium

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

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

effective

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.

end

An ordinary annuity consists of a(n) ________ stream of cash flows for a fixed period of time.

level

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

ordinary

Which of the following is a perpetuity?

A constant stream of cash flows forever

Which of the following is the simplest form of loan?

A pure discount loan

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

perpetuity

Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?

=PV(0.10,10,-100,0,0)

Amortization is the process of paying off loans by regularly reducing the _________.

principal

The general formula for ______ is (1+quoted rate/m)m - 1.

the EAR

Because of __________ and _________, interest rates are often quoted in many different ways.

tradition; legislation

True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

true

True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

true

The cash flows of an annuity due are the same as those of an ordinary annuity except that there is an extra cash flow at Time ________

zero

Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?

EFFECT(0.12,4)

The most common way to repay a loan is to pay ____.

a single fixed payment every period

True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

false. The annuity present value factor equals one minus the present value factor all divided by the discount rate.

The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)^τ]/r.

present

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

uneven

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

compounding

True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).

false. Using the Excel formula to convert a quoted rate (or an APR) to an effective rate, use the formula EFFECT(nominal_rate, npery).

True or false: With interest-only loans, the principle is never repaid.

false. the principle is repaid at some point in the future

A perpetuity is a constant stream of cash flows for a(n) ______ period of time

infinate

When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage.

interest rate

The _______ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

payment

The __________ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

payment

The original amount of a loan is termed the loan ___________.

principal

If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a _______________ .

pure discount loan

what is the formula for the future value of an annuity factor?

((1+r)t−1)/r

Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?

(1+quoted rate/m)^m - 1

The formula for the present value of an annuity due is:

(1+r)×(PV of an ordinary annuity)

which of the following is not a way to amortize a loan?

Fixed interest payments only

You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the _____ value on the financial calculator.

N

An annuity with payments beginning immediately rather than at the end of the period is called an _________.

annuity due

An annuity due is a series of payments that are made ____.

at the beginning of each period

One step in calculating an EAR is to ___________ the quoted rate by the number of times that the interest is compounded.

divide

True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.

false. The payment for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

The annuity present value factor equals one ________ the present value factor all divided by the discount rate.

minus

EAR = (1 + ________ rate/m)m - 1

quoted

With typical interest-only loans, the entire principal is:

repaid at some point in the future

The formula for the future value of an annuity factor is [(1+r)^t -1]/r.

true