FIN 3403 Ch 5 questions
What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year? $100{[1 - (1/(1.10)20)]/1.10} $100{[1 - (1/(1.10)20)]/0.20} $100{[1 - (1/(1.10)^20)]/0.10} $1,100{[1 - (1/(1.10)20)]/0.10}
$100{[1 - (1/(1.10)20)]/0.10}
Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year? Multiple choice question. $100{[1 − (1/(1.10)3)]/0.10} $1,000/{[1 − (1/(1.10)3)]/0.10} $100{[1 − (1/(1.10)3)]/1.20} $1,100{[1 − (1/(1.10)3)]/0.20}
$100{[1 − (1/(1.10)3)]/0.10}
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 $5,000/1.032
$5,000/1.03
The formula for the present value of an annuity due is _____. (1 + r) + (PV of an ordinary annuity) (PV of an ordinary annuity) - (1 + r) (1 + r) × (PV of an ordinary annuity) (PV of an ordinary annuity)/(1 + r)
(1 + r) × (PV of an ordinary annuity)
Which of the following processes can be used to calculate future value for multiple cash flows? -Find the future value of a single lump sum amount -Discount all of the cash flows back to Year 0 -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 -Compound the accumulated balance forward one year at a time
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 Blank______ and multiply that by Blank______. Multiple choice question. 3.1699; 10 4.3553; 10 3.7908; $100 7.7217; $100
3.7908; $100
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? Multiple choice question. $412.98 $402.11 $397.66 $405.63
402.11
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? Multiple choice question. =PV(.10,10,-100,0,) =PV(100,.1,0,10,) =PV(10,-100,.1,0,) =PV(.10,10,100,0,)
=PV(.10,10,-100,0,)
Which of the following is the formula for the future value of an annuity? Multiple choice question. FV = C((1+r)t−1)/r) FV = C((1−r)t+1r) FV = C((1−1(1+r)^t)/r)
FV = C((1+r)t−1)/r)
Which of the following payment methods amortizes a loan? Fixed interest payments only Interest plus fixed amount Single lump sum payment Fixed payments that result in a zero loan balance
Interest plus fixed amount Fixed payments that result in a zero loan balance
APR EAR
The interest rate per period multiplied by the number of periods in the year. The interest rate stated as though it were compounded once per year.
The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______. Multiple choice question. [1 − (1/1.2030)]/.10] [1 − (1/1.1030)]/.20] [1 − (1.1/1.1030)]/.10] [1 − (1/1.10^30)]/.10]
[1 − (1/1.10^30)]/.10]
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____. [1 − (1/1.1820)]/.08 [1 − (1/1.0820)]/1.08 [1 − (1/1.08^20)]/.08 [1.08 − (1/1.0820)]/.08
[1- (1/1.08^20)]/.08
_________is the process of paying off loans by regularly reducing the principal.
amortization
The ________ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
Which compounding interval will result in the lowest future value assuming everything else is held constant? Quarterly Annual Daily Continuous
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
The present value of a(n) _____ of C dollars per period for t periods when the rate of return or interest rate, r, is given by: C × (1 − [1/(1 + r)t]r/)
annuity
An annuity due is a series of payments that are made ____. at the beginning of each period any time in the future 1 year hence 1 year in the past
at the beginning of each period
With a fixed payment loan, the amount of interest paid _____ (decreases/increases) each period.
decreases
An annuity ______ is an annuity for which the cash flows occur at the beginning of each period.
due
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period. Multiple choice question. end beginning middle
end
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
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
The present value of a series of future cash flows is the amount you would need today to _____. make the future cash flows equal to zero break-even on the given exchange rate exactly duplicate those future cash flows exactly half those future cash flows
exactly duplicate those future cash flows
True or false: The APR is always the same as the EAR. True False
false
True or false: There is only one way to quote interest rates. True False
false
A growing annuity has a(n) ____. infinite number of growing cash flows infinite number of constant cash flows finite number of growing cash flows finite number of level cash flows
finite number of growing cash flows
Which type of amortization is most commonly used in the real world for mortgages and car loans? Fixed interest Variable period Fixed payment Fixed principal
fixed payment
The present value of a series of ______ cash flows is the amount you would need today to exactly duplicate those future cash flows.
future
Assuming the same interest rate, the future value of an amount compounded semiannually is ______ the future value of that amount compounded annually. equal to less than greater than twice as much as
greater than
The future value of $100 at 10 percent compounded semiannually is ______ the future value of $100 at 10 percent compounded annually. equal to greater than less than
greater than
Given the same APR, more frequent compounding results in _____. Multiple choice question. rounder EARs lower EARs higher EARs
higher EARs
A perpetuity is a constant stream of cash flows for a(n) ______ period of time. random infinite undetermined finite
infinite
Which of the following are annuities? Multiple select question. Installment loan payments Monthly grocery bill Tips to a waiter Monthly rent payments in a lease
installment loan payments monthly rent payments in a lease
Which of the following are annuities? Multiple select question. Monthly rent payments in a lease Installment loan payments Monthly grocery bill Tips to a waiter
installment loans monthly rent
The most common way to repay a loan is to pay: interest plus a fixed principal amount every period. a lump sum of interest and principal at the end of the loan. a fixed amount of interest and a fixed amount of principal each period. just interest every period.
interest plus a fixed principal amount every period
Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is: the same. less. more.
less
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum. stair-step reduced lump inflated
lump
A single cash flow is also known as a: level cash flow multiple cash flow terminal cash flow lump sum
lump sum
Most investments involve _____ cash flows. single multiple no lump sum
multiple
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. one year two years three years half a year
one year
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r). deferred actuarial middle ordinary
ordinary
A typical investment has a large cash______ (inflow/outflow) at the beginning and then a cash ______(inflow/outflow) 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:
paid off in a lump sum
The loan balance on _______amortization loans declines so slowly because the payments are mostly interest.
partial
The payments in a Blank______ 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. number of periods payment interest rate type of annuity
payment
The loan balance on partial amortization loans declines so slowly because the ___.
payments are mostly interest
The loan balance on partial amortization loans declines so slowly because the ___. payments are mostly principal interest rate rises over the years payments are mostly interest yearly payment rises steadily over the years
payments are mostly interest
Which of the following are real-world examples of annuities? Pensions Common stock dividends Mortgages
pensions mortgages
Which of the following should be valued using a perpetuity formula? Preferred stock 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 A consol (bond that pays interest only and does not mature)
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)
The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]r} future present
present
Amortization is the process of paying off loans by regularly reducing the _________. interest rate life of the loan payment frequency principal
principal
The original loan amount is called the _____. interest only principal fixed repayment amortization
principal
Versus a similar fixed payment loan, the total interest on a fixed_____ loan is less
principal
Which of the following is the simplest form of loan? A partially amortized loan An interest-only loan A pure discount loan An amortized loan
pure discount loan
With interest-only loans that are not perpetuities, the entire principal is _____. never repaid repaid at some point in the future repaid before any interest payments are made
repaid at some point in the future
To use a present value of an annuity table to find the present value of an annuity factor, search the Blank______ for the number of periods and the Blank______ for the rate. column; row diagonal; column row; diagonal row; column
row; column
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______. continuously daily semiannually quarterly
semiannually
The APR is also called the Blank______ rate and it differs from the EAR. average reversed inflated stated
stated
Which of the following is true about a growing annuity? 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 an infinite period.
the cash flows grow at a constant rate the cash flows grow for a finite period
Because of __________ and _________, interest rates are often quoted in many different ways. tradition; legislation religion; randomness mathematics; evolution
tradition; legislation
The formula for the present value interest factor for annuities is: Annuity present value factor = {1-[1/(1+r)^t]}/r. True False
true
True or false: A fixed payment loan is most common for consumers. True False
true
Semiannual compounding means that interest is paid ______ per year. Multiple choice question. one time three times two times twelve times
two times
