Chapter 9 true or false

The future value of a $100 ordinary annuity deposited for 10 years at 10% is:

$1,583.74 ordinary annuity: end 100$ payment

The future value of $100 deposited today for years at 10% compounded annually is:

$259.37

The present value of $100 received in 10 years at 10% compounded annually is:

$38.55

The present value of a $100 ordinary annuity deposited for 10 years at 10% is:

$614.46 ordinary annuity: end $100: payment

The return provided by $100 deposited today for 10 years that results in a future value of $614.46 is:

19.91%

The interest portion increases and the principal portion decreases over time under a typical loan amortization schedule

False, decrease increase

Simple Interest is interest earned on the investment's principal and subsequently earned interest

False, not subsequently earned interest

$1000 deposited in a bank that earns 7% per year will become approximately $7,600 in 30 years

True

As the interest rate increases, present value decreases

True

If the compound inflation rate were greater than the compound interest rate, future purchasing power on our savings would fall.

True

It will take approximately 18.8 years for a $100 deposit to grow to $600 if I can earn 10% on my deposit

True

Money has a time value so long as interest is earned by saving or investing money

True

An ordinary annuity exists when the equal payments occur at the beginning of each time period

false

an annuity due may also be referred to as a deferred annuity

false

for a given discount rate, an ordinary annuity and an annuity due have the same present value

false

with compound interest, interest is earned only on the investment's principal

false

the effective annual rate is dertmined by multiplying the interest rate charged per period by the number of periods in a year

false, ARM

The annual percentage rate is the true opportunity cost measure of the interest rate

false, EAR

At very high interest rates the "rule of 72" will result in a small estimation error for the estimate of time for an investment to double

false, large error and same for low interest rates

level of cash flow amounts that occur at the end of each period, starting at the end of the first period, are an annuity due

false, ordinary annuity

as the number of periods increases, present value increases.

false, pv decreases

if the interest rate is 0 for 10 years, then the present value will be less than the future value

false, the same

because interest compounds, the annual percentage rate formula will overstate the true interest cost of a loan

false, understate

The annual percentage state overstates the true or effective interest rate cost

false, understates

A loan amortization schedule shows the breakdown of each payment between interest and principal, as well as the remaining balance after each payment

true

Compounded interest is interest earned on interest in addition to interest earned on the principal

true

Compounding means that interest earned each year, plus the principal, will be reinvested at the stated rate

true

Discounting is an arithmetic process whereby a future sum decreases at a compounding interest rate over time to reach a present value.

true

a fixed-rate mortgage is an example of an annuity

true

an amortized loan is repaid in equal payments over a specified time period

true

an annuity is a series of equal payments that occur over a number of time periods

true

at a zero interest rate, the present value of 1$ remains at 1$ and is not affected by time

true

for the same annual percentage rate, more frequent compounding increases the future value of an investor's funds more quickly

true

the Rule of 72 is an estimate of how long it would take to double a sum of money at a given interest rate

true

the effective annual rate is sometimes called the annual effective yield

true

the effective annual rate is the true opportunity cost measure of the interest rate

true

the method of calculating the annual percentage rate is set by law

true

when the annual interest rate stays the same, more frequent interest compounding helps savers earn more interest over the course of the year

true

at very low interest rates, the "rule of 72" does not approximate the compounding process well

true, same for high interest rates