Finance 2000 chapter 6 Chapter questions
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%? Multiple choice question.
$5,000/1.03
Which of the following are annuities?
-Installment loan payments -Monthly rent payments in a lease
Which of the following is equal to an effective annual rate of 12.36 percent?
12%, compounded semiannually
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
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
A typical investment has a large cash _______(inflow/outflow) at the beginning and then a cash ________(inflows/outflows) for many years.
Outflow, Inflow
Which of the following are real-world examples of annuities?
Pensions Mortgages
Which of the following is true about a growing annuity?
The cash flows grow for a finite period. The cash flows grow at a constant rate.
The U.S. government borrows money by issuing:
Treasury bonds, and treasury notes, treasury bills
When the U.S. government wants to borrow money for the long-term (more than one year) it issues:
Treasury notes Treasury bonds
Semiannual compounding means that interest is paid ______ per year.
Two times
Which shape does the term structure of interest rates usually have?
Upward sloping
The_____ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
The________ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
The_______ future value factor is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
The________ future value factor is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
An annuity due is a series of payments that are made ____. Multiple choice question.
at the beginning of each period
When calculating the future value of multiple cash flows using a spreadsheet, you must:
calculate the future value of each cash flow then add the compounded values together
When calculating the present value of multiple cash flows using a spreadsheet, you must:
calculate the present value of each cash flow then add the discounted values together
An annuity_______ is an annuity for which the cash flows occur at the beginning of each period.
due
n almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
n 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?
every instant
True or false: There is only one way to quote interest rates.
false
A growing annuity has a(n) ____
finite number of growing cash flows
Given the same APR, more frequent compounding results in _____. Multiple choice question.
higher EARs
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
If the term structure of interest rates is upward sloping, then ____. Multiple choice question.
long-term rates are higher than short-term rates
Most investments involve _____ cash flows.
multiple
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
The loan balance on ________-amortization loans declines so slowly because the payments are mostly interest.
partial
The loan balance on partial amortization loans declines so slowly because the ___. Multiple choice question.
payments are mostly interest
The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]r}.
present
The original loan amount is called the _____.
principal
With interest-only loans that are not perpetuities, the entire principal is _____.
repaid at some point in the future
Interest paid twice a year is known as ______ compounding. Multiple choice question.
semiannual
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
True or false: The formula for the present value interest factor for annuities is Annuity present value factor = {1-[1/(1+r)t]}r .
true
Which of the following processes can be used to calculate future value for multiple cash flows?
Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up