Fin Mgmt Ch 5

Find the future value of an annuity for $100 per year for 10 years at 10 percent per year.

$1593.74

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 the quoted interest rate is 2% per month (APR = 24%), what is the EAR?

26.82%

You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2-week period. What is our stated annual interest rate?

260.00%

The present value interest factor for a 30 year annuity with an interest rate of 10 percent per year is ___.

9.4269

the effective annual rate (EAR) takes into account the ___ of interest that occurs within a year.

Compounding

Which of the following is the appropriate excel function to convert a quoted rate of 12% compounded quarterly to an EAR?

EFFECT(0.12,4)

When finding the present or future value of an annuity using a financial calculator, the ___ should be entered as a percentage

Interest rate

The most common way to repay a loan is to pay ___.

a single fixed payment each period

A 30 year home mortgage is a classic example of

an ordinary annuity

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

annual percentage rate

An annuity due is a series of payments that are made ___.

at the beginning of the period

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ___ of the period.

end

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

A perpetuity is a constant stream of cash flows for a(n) ___ period of time.

infinite

An ordinary annuity consists of a(n) ___ stream of cash flows for a fixed period of time.

level

The present value of an annuity due is equal to the present value of a(n) ___ annuity multiplied by (1+r).

ordinary

The entire principal of an interest-only loan is the:

original loan amount

The present value formula of a ___ is PV = C/r , where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

perpetuity

If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a ___.

pure discount loan

With typical interest-only loans, the entire principal is:

repaid at some point in the future

An interest rate expressed in terms of the interest payments made each period is called a(n) ___.

stated interest rate quoted interest rate

Which on of these is a perpetuity

trust income of $1,200 a year forever

What is the present value of a perpetuity paying $150 at the end of each year at 8%.

$1875

Alice has $20,000 in an account that pays 8% per year. Alice wants to withdraw equal amounts at the end of the next 10 years. How much will Alice receive each year?

$2980.59

What is the present value of the following cash flow stream discounted at 6%? $100 in years 1 and 2 followed by $200 in years 3 and 4.

$509.68

Given an annuity that has a payment of $35 per year, an annual interest rate of 3%, and a present value of $130, it will last for ___ years.

4

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)

The interest rate charged per period multiplied by the number of periods per year is the ___

Annual percentage rate

Which of the following is NOT a way to amortize a loan?

Fixed interest payments only

Which of the following are real-world examples of annuities?

Leases Pensions Mortgages

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which of the following terms best describes these scholarship payments?

annuity due

In the excel setup of a loan amortization problem, which of the following occurs?

to find the principal payment each month, you subtract the dollar interest payment from the fixed payment. The payment is found with =PMT(rate, nper, -pv, fv)

Because of ___ and ___, interest rates are often quoted in many different ways.

tradition and legislation

The formula for the future value of an annuity factor is [(1+r)^t-1]/r.

true

What is the future value of $100 deposited each year for 2 years beginning next year, then $200 deposited for the next two years if you can earn 6% per year?

$643.46

Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10% yearly interest. How much is the second interest payment?

$80

When entering variables in an Excel function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says the outflows are negative values; inflows are positive values. For which variables is this a consideration?

Present value future value payment

True or False: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)^r)]}/r

true

True or False: When calculating the present value of an annuity using the financial calculator, you enter cash flows of the annuity in the PMT key

true