Finance Chapter 5: Discounted Cash Flow Valuation
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
Which of the following is the formula for the future value of an annuity factor?
( (1+r)t−1 ) / r
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
The formula for the present value of an annuity due is:
(1+r)×(PV of an ordinary annuity)
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 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 of the following processes can be used to calculate the future value of multiple cash flows?
Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then sum them
The general formula for ______ is (1+quoted rate/m)^m - 1.
EAR
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)
When calculating annuity present values using a financial calculator, the ______ amount is left blank. (Enter the abbreviation only.)
FV
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 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: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.
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: 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 using a financial calculator to find the number of payments, the PMT value should be entered as a positive.
False
True or false: With interest-only loans, the principle is never repaid.
False
Which of the following is not a way to amortize a loan?
Fixed interest payments only
More frequent compounding leads to:
Higher EARs
You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the _____ value on the financial calculator.
N
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.
Which of the following are real-world examples of annuities?
Pensions Mortgages Leases
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).
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
True or false: Interest rates can be quoted in various ways.
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: The perpetuity present value can be found using the perpetual cash flow and the discount rate.
True
True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
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
The interest rate charged per period multiplied by the number of periods per year is equal to ___ ___ ___ on a loan.
annual percentage rate
An annuity with payments beginning immediately rather than at the end of the period is called an _________.
annuity due
An annuity due is a series of payments that are made ____.
at the beginning of each period
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
compounding
One step in calculating an EAR is to ____ the quoted rate by the number of times that the interest is compounded.
divide
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
effective
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
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
EAR = (1 + quoted rate / m)^m - 1
equation
If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.
greater than
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage.
interest rate
When finding the present or future value of an annuity using a spreadsheet, the ______ ______ should be entered as a decimal.
interest rate
An ordinary annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
level
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
The annuity present value factor equals one ____ the present value factor all divided by the discount rate.
minus
Which of the following could not be evaluated as annuities or annuities due?
monthly electric bills tips to a waiter
When using a financial calculator to find the number of payments, the PMT value should be entered as a _____.
negative
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
The _____ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
payment
C/r is the formula for the present value of a(n) ____.
perpetuity
The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
present value can be found using the perpetual cash flow and the discount rate.
perpetuity
The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)^τ]/r.
present
When entering variables in a spreadsheet function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?
present value payment future value
Amortization is the process of paying off loans by regularly reducing the _________.
principal
The original amount of a loan is termed the loan ___________.
principal
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
Compounding during the year can lead to a difference between the ____ rate and the effective rate.
quoted or stated
With typical interest-only loans, the entire principal is:
repaid at some point in the future
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
The formula for the future value of an annuity factor is [(1+r)^t -1]/r.
true
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
uneven
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