Chapter 5 Business Finance Smartbook
T/F The annuity due calculation assumes cash flows occur evenly throughout the period
False
When finding the present or future value of an annuity using a financial calculator, the Blank should be entered as a percentage.
Interest rate
The entire principal of an interest-only loan is the:
original loan amount
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12 percent compounded quarterly to an EAR?
EFFECT(0.12,4)
True or false: With interest-only loans, the principal is never repaid. True false question.
false
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
If you borrow $15,000 today at 5 percent annual interest to be repaid in one year as a lump sum, this is termed a Blank______.
pure discount loan
Compounding during the year can lead to a difference between the rate and the effective rate. (Enter only one word per blank.)
quoted
With typical interest-only loans, the entire principal is:
repaid at some point in the future.
The general formula for Blank______ is (1 + quoted rate/m)m − 1.
the EAR
The formula for the future value of an annuity factor is [(1 + r)^t − 1]/r.
true
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 percent per year?
PV(0.10,10,-100,0,0)
Which of the following are ways to amortize a loan?
Pay the principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal.
In the Excel setup of a loan amortization problem, which of the following occurs?
The payment is found with = PMT(rate, nper, -pv, fv). To find the principal payment each month, you subtract the dollar interest payment from the fixed payment.
T/F The annuity present value factor equals one minus, the present value factor all divided by the discount rate.
True
T/F The interest rate charged per period on a loan multiplied by the number of periods per year equals the annual percentage rate.
True
T/FThe annuity present value factor equals one minus the present value factor all divided by the discount rate.
True
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
The present value of an annuity due is equal to the present value of a(n) Blank______ annuity multiplied by (1 + r).
ordinary
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the Blank______ of the period.
End
To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using the tables, find a present value factor of 6.1446 and multiply it by Blank______.
100
Which of the following spreadsheet functions will result in the correct answer for the below annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8 percent. How much will you have in this annuity?
= FV(.08,10,-100,0)
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
True or false: To find the annuity future value factor, you only need the cash flows and the discount rate.
False
The present value of an annuity due is equal to the present value of a(n) Blank______ annuity multiplied by (1 + r).
Ordinary
T/F Using the Excel formula to convert a quoted rate (or an APR) to an effective rate, use the formula EFFECT(nominal_rate, npery).
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 annual rate is the interest rate expressed as if it were compounded once per year.
effective
The blank _____ annual rate is the interest rate expressed as if it were compounded once per year.
effective
If the interest rate is greater than zero, the value of an annuity due is always Blank______ an ordinary annuity.
greater than
The blank _____ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
payment
C/r is the formula for the present value of a(n)
perpetuity
The blank _____ present value can be found using the perpetual cash flow and the discount rate.
perpetuity
The present value formula for a(n) Blank______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
Which of the following is the formula for the future value of an annuity factor?
((1+r)^t−1))/ r
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) Blank______ type of cash flow.
uneven
Which of the following processes can be used to calculate the future value of multiple cash flows?
Calculate the future value of each cash flow first and then sum them. Compound the accumulated balance forward one year at a time.
The effective annual rate (EAR) takes into account the Blank______ of interest that occurs within a year.
Compounding
True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period. True false question.
False
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
True
True or false: Interest rates can be quoted in various ways.
True
True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.
True
The formula for the present value interest factor of an annuity is
[1 − 1/(1 + r)t]/r.
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
The most common way to repay a loan is to pay Blank______.
a single fixed payment every period
The interest rate charged per period multiplied by the number of periods per year is equal to blank ____ on a loan.
annual percentage rate
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
The annuity present value of an amount C is calculated as
c*{1−[1/(1+r)t]r}
Assume interest is compounded monthly. The Blank______ annual rate will express this rate as though it were compounded annually.
effective
Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the
per value
Amortization is the process of paying off loans by regularly reducing the Blank
principal
When calculating annuity present values using a financial calculator, the BLANK_____ amount is left blank
Future Value
One step in calculating an EAR is to blank _____ the quoted rate by the number of times that the interest is compounded.
divide
T/F If the interest rate is greater than zero, the value of an annuity due is always greater than an ordinary annuity.
True
T/F The stated interest rate is the interest rate expressed in terms of the interest payment made each period.
True
A perpetuity is a constant stream of cash flows for a(n) Blank______ period of time.
infinite
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 blank _____ -term business loans.
medium
Because of Blank______ and Blank______, interest rates are often quoted in many different ways.
tradition and legislation
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 Blank______ value on the financial calculator.
N
The formula for the future value of an annuity factor is
[(1 + r)^t − 1]/r.
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the Blank______ of each period.
End
Which of the following is not a way to amortize a loan?
fixed interest payments only
EAR =
(1 + quoted rate/m)^m - 1
The formula for the present value of an annuity due is:
(1 + r) × (PV of an ordinary annuity).
T/F To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
True
More frequent compounding leads to Blank______.
higher EARs