Assignment 5
Which compounding interval will result in the lowest future value assuming everything else is held constant? Annual Continuous Daily Quarterly
Annual
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
True or false: There is only one way to quote interest rates.
False
Which of the following payment methods amortizes a loan? Fixed payments that result in a zero loan balance Interest plus fixed amount Fixed interest payments only Single lump sum payment
Fixed payments that result in a zero loan balance Interest plus fixed amount
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year. subtracting adding discounting compounding
compounding
With a fixed payment loan, the amount of interest paid (decreases/increases) each period.
decreases
To use a present value of an annuity table to find the present value of an annuity factor, search the ______ for the number of periods and the ______ for the rate. diagonal; column row; column column; row row; diagonal
diagonal; column row; column
The loan balance on partial amortization loans declines so slowly because the ___. interest rate rises over the years payments are mostly principal payments are mostly interest yearly payment rises steadily over the years
payments are mostly interest
he effective annual rate (EAR) takes into account the ______ of interest that occurs within a year. adding discounting subtracting compounding
compounding
The future value of $100 at 10 percent compounded semiannually is ______ the future value of $100 at 10 percent compounded annually. greater than less than equal to
greater than
f the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity. greater than equal to less than
greater than
Interest paid twice a year is known as ______ compounding. semiannual biannual monthly weekly
semiannual
Which of the following processes can be used to calculate future value for multiple cash flows? Discount all of the cash flows back to Year 0 Find the future value of a single lump sum amount 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 Calculate the future value of each cash flow first and then add them up
True or false: The APR is always the same as the EAR.
False
_____ loans are short-term loans made to consumers which require you to write a check today that is postdated. Mortgage Spiked Reverse Payday
Payday
True or false: A fixed payment loan is most common for consumers.
True
When calculating the present value of multiple cash flows using a spreadsheet, you must: use the time value of money tables to calculate the present value of each cash flow calculate the future value of each cash flow then add the compounded values together calculate the present value of each cash flow then add the discounted values together
calculate the present value of each cash flow then add the discounted values together
One example of a perpetuity is a British _____. consol pound solace royal flush
consol
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
Assuming the same interest rate, the future value of an amount compounded semiannually is ______ the future value of that amount compounded annually. less than equal to twice as much as greater than
greater than
Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is: more. less. the same.
less.
A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time. level random uneven infinite
level
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum. inflated reduced lump stair-step
lump
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. annuity growing annuity perpetuity growing perpetuity
perpetuity
Amortization is the process of paying off loans by regularly reducing the _________. life of the loan payment frequency principal interest rate
principal
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______. continuously semiannually daily quarterly
semiannually
The APR is also called the Blank______ rate and it differs from the EAR. inflated reversed stated average
stated
Semiannual compounding means that interest is paid ______ per year. two times one time three times twelve times
two times
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? $397.66 $412.98 $405.63 $402.11
$402.11
Which of the following is equal to an effective annual rate of 12.36 percent? 12%, compounded annually 12%, compounded semiannually 12%, compounded monthly 12%, compounded quarterly
12%, compounded semiannually
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 ______ and multiply that by ______. 4.3553; 10 7.7217; $100 3.7908; $100 3.1699; 10
3.7908; $100
____ is the process of paying off loans by regularly reducing the principal.
Amortized
You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, which of the following show the steps you will apply using a financial calculator to solve for the number of months will it take to pay off your credit card? Enter −50 for PMT, 1,200 for PV, and 5 for I/Y. Solve for N. Enter −50 for PMT, 1,200 for PV, and 1.5 for I/Y. Solve for N. Enter −1,500 for PMT, 1200 for PV, and 1.5 for I/Y. Solve for N. Enter −1,200 for PMT, 50 for PV, and 1.5 for I/Y. Solve for N.
Enter −50 for PMT, 1,200 for PV, and 1.5 for I/Y. Solve for N.
Which type of amortization is most commonly used in the real world for mortgages and car loans? Fixed principal Fixed interest Fixed payment Variable period
Fixed payment
Which of the following show the inputs you would use in a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%? In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV. In your financial calculator, enter 100 for PMT, 5 for N, and 30 for I/Y. Solve for PV. In your financial calculator, enter 5 for PMT, 30 for N, and 5 for I/Y. Solve for PV.
In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV.
Which of the following are annuities? Monthly grocery bill Installment loan payments Monthly rent payments in a lease Tips to a waiter
Installment loan payments Monthly rent payments in a lease
Which of the following are ways to amortize a loan? Pay principal and interest every period in a fixed payment. Pay both interest and principal in one lump sum at maturity Pay the interest each period plus some fixed amount of the principal. Pay only interest every period and pay the principal off at maturity
Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal.
annual percentage rate (APR)
The interest rate charged per period multiplied by the number of periods per year.
effective annual rate (EAR)
The interest rate expressed as if it were compounded once per year.
When using a financial calculator to find the interest rate, you may use the inputs N, PMT, and PV to find I/____.
Y
Which of the following is the formula for the EAR? [1/(Quoted rate/m)]^m − 1 (Quoted rate/m)^m − 1 [1 + (Quoted rate/m)]^m − 1
[1 + (Quoted rate/m)]^m − 1
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. calculate the present value of each cash flow then add the discounted values together. use the time value of money tables to calculate the future value of each cash flow.
calculate the future value of each cash flow then add the compounded values together.
The name for a perpetuity in Canada and the United Kingdom is a ____.
consol
An annuity ____ is an annuity for which the cash flows occur at the beginning of each period.
due
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually. effective stated nominal implicit
effective
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually. implicit stated effective nominal
effective
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually. nominal effective stated implicit
effective
The present value of a series of future cash flows is the amount you would need today to _____. break-even on the given exchange rate make the future cash flows equal to zero exactly half those future cash flows exactly duplicate those future cash flows
exactly duplicate those future cash flows
A single cash flow is also known as a: multiple cash flow terminal cash flow level cash flow lump sum
lump sum
Most investments involve _____ cash flows. no single lump sum multiple
multiple
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. three years two years half a year one year
one year
A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) 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: amortized just like the first part. forgiven by the lender. amortized over the remaining loan period. paid off in a lump sum bullet payment.
paid off in a lump sum bullet payment.
The loan balance on ____ amortization loans declines so slowly because the payments are mostly interest.
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. interest rate payment number of periods type of annuity
payment
C/r is the formula for the present value of a(n) ____. growing annuity growing perpetuity perpetuity annuity
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 growing annuity annuity growing perpetuity
perpetuity
The original loan amount is called the _____. interest only principal amortization fixed repayment
principal
Because of __________ and _________, interest rates are often quoted in many different ways. mathematics; evolution tradition; legislation religion; randomness
tradition; legislation
If the interest rate is greater than ____, the value of an annuity due is always greater than an ordinary annuity.
zero
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 $5,000/1.03^2
$5,000/1.03
The formula for the present value of an annuity due is _____. (1 + r) + (PV of an ordinary annuity) (1 + r) × (PV of an ordinary annuity) (PV of an ordinary annuity)/(1 + r) (PV of an ordinary annuity) - (1 + r)
(1 + r) × (PV of an ordinary annuity)
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? =PV(.10,10,100,0,) =PV(10,-100,.1,0,) =PV(.10,10,-100,0,) =PV(100,.1,0,10,)
=PV(.10,10,-100,0,)
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? =PV(100,.1,0,10,) =PV(.10,10,-100,0,) =PV(10,-100,.1,0,) =PV(.10,10,100,0,)
=PV(.10,10,-100,0,)
Which of the following is a perpetuity? An undulating stream of cash flows forever A constant stream of cash flows forever A growing stream of cash flows for a fixed period A constant stream of cash flows for a fixed period
A constant stream of cash flows forever
Which of the following is the simplest form of loan? An amortized loan A partially amortized loan A pure discount loan An interest-only loan
A pure discount loan
Which of the following is the simplest form of loan? An interest-only loan An amortized loan A pure discount loan A partially amortized loan
A pure discount loan
Another common term for the effective annual rate (EAR) is the: APY APR YTM SAIR
APY
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $100 per year for 10 years at 15%? Enter 100 for PMT, 10 for N, and 5 for I/Y. Solve for FV. Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV. Enter 100 for N, 10 for PMT, and 15 for I/Y. Solve for FV.
Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV.
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%? Enter 400 for N, 10 for PMT, and 5 for I/Y. Solve for FV. Enter 100 for PMT, 10 for N, and 5 for I/Y. Solve for FV. Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.
Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.
You may use which of the following sets of inputs together to solve for the present value of an annuity using a financial calculator? RATE, PV, NPV, I/Y N, NPER, PMT, PV N, I/Y, PMT, PV N, I/Y, RATE, PV
N, I/Y, PMT, PV
Which of the following are real-world examples of annuities? Common stock dividends Pensions Mortgages
Pensions Mortgages
Which of the following is true about a growing annuity? The cash flows grow for an infinite period. 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 a finite period. The cash flows grow at a constant rate.
Which of the following are true about the amortization of a fixed payment loan? The principal amount paid increases each period. The amount of interest and principal paid increases each period. The payment amount decreases each period. The amount of interest paid decreases each period.
The principal amount paid increases each period. The amount of interest paid decreases each period.
In the Excel setup of a loan amortization problem, which of the following occurs? To find the new balance, you subtract the interest payment from the old balance. To find the principal payment each month, you subtract the interest payment from the total payment. To find the dollar interest each month, you multiply the balance times the yearly interest rate. The payment is found using PMT(rate, nper,-pv, fv).
To find the principal payment each month, you subtract the interest payment from the total payment. The payment is found using PMT(rate, nper,-pv, fv).
The ____ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
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
An annuity due is a series of payments that are made ____. 1 year hence 1 year in the past any time in the future at the beginning of each period
at the beginning of each period
lump sum payment to pay off the balance of a partially amortized loan is called a ______, payment. bullet or shell balloon or bullet balloon, or bucket pistol and bullet
balloon or bullet
Payday loans allow you to ___. borrow on paydays only pay back part of the loan every payday pay back the loans only on paydays borrow now and repay later
borrow now and repay later
A growing annuity has a(n) ____. infinite number of constant cash flows finite number of growing cash flows infinite number of growing cash flows finite number of level cash flows
finite number of growing cash flows
The present value of a series of ____ cash flows is the amount you would need today to exactly duplicate those future cash flows.
future
A perpetuity is a constant stream of cash flows for a(n) ______ period of time. undetermined infinite random finite
infinite
For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always (smaller/larger) than the APR.
larger
For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ______ the APR. larger than smaller than equal to
larger than
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r). deferred actuarial ordinary middle
ordinary
The payments in a Blank______ amortization loan are NOT based on the life of the loan. remunerative federal full partial
partial
Versus a similar fixed payment loan, the total interest on a fixed ____ loan is less.
principal
The _____ rate is used to find the EAR. quoted inverted interest discount yield inflation
quoted
With interest-only loans that are not perpetuities, the entire principal is _____. repaid at some point in the future repaid before any interest payments are made never repaid
repaid at some point in the future
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. annuity consol uneven perpetuity
uneven
Another common name for the effective annual rate is the annual percentage ______. investment yield owed retreat
yield
Which of the following should be valued using a perpetuity formula? Cash flows from a product whose sales are expected to remain constant forever Preferred stock A consol (bond that pays interest only and does not mature) 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 Preferred stock A consol (bond that pays interest only and does not mature)
You are planning to buy a CD for $1,352. You will receive $1,500 in 2 years. Which inputs will you use in a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding? Enter −1,352 for PV, 10 for N, and 1,500 for FV. Solve for I/Y. Enter −1,500 for PV, 2 for N, and 1,352 for FV. Solve for I/Y. Enter −1,000 for PV, 2 for N, and 1,500 for FV. Solve for I/Y. Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.
Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.