Chap 6 -- BF
Which of the following are real-world examples of annuities?
-pensions -mortgages
The formula for the present value of annuity due is:
(1 + r) x (PV of an ordinary annuity)
Which of the following is the simplest form of loan?
A pure discount loan
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
APR:
The interest rate per period multiplied by the number of periods in the year
The most common way to repay a loan is to pay _________
a single fixed payment every period which includes both interest and principal
The effective annual rate (EAR) takes into account the ________ of interest that occurs within a year
compounding
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ______ of each period.
end
A growing annuity has a(n) ______________
finite number of growing cash flows
Most investments involve:
multiple cash flows
With interest-only loans that are NOT perpetuities, the entire principal is:
repaid at some point in the future
Your bank quotes a 9% APR on your car loan (.75 percent interest each month). What is the EAR?
9.38%
Which of the following should be valued using a perpetuity formula?
-preferred stock -cash flows from a product whose sales are expected to remain constant forever -a consol (bond that pays interest only and does not mature)
Which of the following processes can be used to calculate future value for multiple cash flows?
-calculate the future value of each cash flow first and then add them up -compound the accumulated balance forward one year at a time
Which of the following are true about a partial amortization loan?
-The amortization period is longer than the loan period -The monthly payments do not fully pay off the loan by the end of the loan period -The borrower makes a large balloon payment at the end of the loan period. -The monthly payment is based on a longer amortization period than the maturity of the loan.
Which of the following are annuities?
-installment loan payments -monthly rent payments in a lease
Which of the following payment methods amortizes a loan?
-Fixed payments that result in a zero loan balance -Interest plus fixed amount
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
Interest paid twice a year is known as _____ compounding.
semi-annual
What are two ways to calculate a balloon payment?
-Amortize the loan over the loan life to find the ending balance -Find the present value of the payments remaining after the loan term
Which of the following is true about a growing annuity?
-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 amount of interest paid decreases each period -the principal amount paid increases each period
In the Excel setup of a loan amortization problem, which of the following occurs?
-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 payments in a __________ amortization loan are NOT based on the life of the loan
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.
payment
C/r is the formula for the present value of a(n) ________
perpetuity
The formula for the __________ value interest factor of an annuity is {1 - [1/(1 + r)^t]/r}
present
Amortization is the process of paying off loans by regularly reducing the _________
principal
The original load amount is called the:
principal
A single cash flow is also known as a:
lump sum
If the stated interest rate is 10 percent, what is the EAR if interest is compounded monthly?
10.47%
Another common term for the effective annual rate (EAR) is the:
APY (annual percentage yield
EAR:
The interest rate stated as though it were compounded once per year.
For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ___________ the APR.
larger than
A traditional (non-growing) annuity consists of a(n) _________ stream of cash flows for a fixed period of time
level
Because of ____________ and ____________, interest rates are often quoted in many different ways.
tradition; legislation