FIN E.C. #3
FV = ×(1 + r)t
PV
True or false: Interest rates can be quoted in various ways.
True
An annuity due is a series of payments that are made ____.
at the beginning of each period
Future value is the ________ value of an investment at some time in the future.
cash
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
With interest, the interest is not reinvested.
Simple
Which of the following are the primary as well as easy ways used to perform financial calculations today?
Spreadsheet functions Financial calculator
If you invest at a rate of r for periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
Two
EAR = (1 + rate/m)m - 1
quoted
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)
True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.
False
True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.
False
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
False
True or false: When using a financial calculator to find the number of payments, the PMT value should be entered as a positive.
False
With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.
present; future
The amount an investment is worth after one or more periods is called the _____ value.
future
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV×(1 + r)t
True or false: The formula for a present value factor is 1/(1+r)t
True
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
True
The interest rate charged per period multiplied by the number of periods per year is equal to on a loan.
annual percentage rate
In a present value equation, the rate can be found using the PV, FV, and t.
discount
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
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
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21
Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?
1.4400
Which formula below represents a present value factor?
1/(1+r)t
Which of the following spreadsheet functions will result in the correct answer for the following annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8%. How much will you have in this annuity?
=FV(.08,10,-100,0)
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)
Which of the following methods are used to calculate present value?
An algebraic formula A financial calculator A time value of money table
To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?
Because the $100 is an outflow from you which should be negative.
True or false: Given the PV, FV, and payment amount, you can determine the number of periods.
False
True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.
False
True or false: The interest rate charged per period on a loan divided by the number of periods per year equals the annual percentage rate.
False
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: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.
False
True or false: To find the annuity future value factor, you only need the cash flows and the discount rate.
False
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
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
False
Which of the following is not a way to amortize a loan?
Fixed interest payments only
Which of the following are ways to amortize a loan?
Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal.
The formula for the future value of an annuity factor is [(1+r)t -1]/r.
True
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
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: 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 most common way to repay a loan is to pay ____.
a single fixed payment every period
Future value is the value of an investment at some time in the future.
cash
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
compounding
The idea behind ______ is that interest is earned on interest.
compounding
When using a financial calculator to find the number of payments, the PMT value should be entered as a .
negative
The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)τ]/r.
present
The original amount of a loan is termed the loan ___________.
principal
Compounding during the year can lead to a difference between the rate and the effective rate.
quoted
The real world has moved away from using _____________________________ for calculating future and present values.
time value of money tables
If you invest at a rate of r for periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
two
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 or 0
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
Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the value.
nper
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1+ r).
ordinary
The entire principal of an interest-only loan is the:
original loan amount
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
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
Which of the following is the formula for the future value of an annuity factor?
(1+r)t−1/r
The formula for the present value of an annuity due is:
(1+r)×(PV of an ordinary annuity)
Using the PV, discount rate, and , you can determine the number of periods. (Enter abbreviation only.)
FV
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
effective
The annual rate is the interest rate expressed as if it were compounded once per year.
effective
If FV= PV x (1+r) is the single period formula for future value, which of the following is the single period present value formula?
PV = FV/(1+r)
Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r per cent interest?
PV = FV/(1+r)t
An annuity with payments beginning immediately rather than at the end of the period is called an _________.
annuity due
Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.
discounted cash flow (DCF)
One step in calculating an EAR is to the quoted rate by the number of times that the interest is compounded.
divide
Amortization is the process of paying off loans by regularly reducing the _________.
principal
The for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
payment
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.
The general formula for ______ is (1+quoted rate/m)m - 1.
the EAR
True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.
False
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
True
The process of accumulating interest in an investment over time to earn more interest is called _________.
compounding
The current value of a future cash flow discounted at the appropriate rate is called the _____ value.
present
If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.
greater than
More frequent compounding leads to:
higher EARs
An ordinary annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
level
The annuity present value factor equals one the present value factor all divided by the discount rate.
minus
True or false: Future value refers to the amount of money an investment is worth today.
False
When calculating annuity present values using a financial calculator, the amount is left blank. (Enter the abbreviation only.)
FV