BA323 Chapter 5

Suppose you paid off a $1200 loan by paying $400 in principal each year plus 10 percent annual interest over a 3-year period. What is the total payment (interest plus principal in year 3?

$440 400 400 + (1200-800) * 10 =440

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

You agree to repay $1200 in 2 weeks for a $1000 payday loan. What is your EAR assuming that there are 52 weeks in a year?

11,347.55%

A credit card charges 18% interest per year (1.5% each month) what is the EAR.

19.56 (1.015)^12 -1

Which of the following processes can be used to calculate the future value of multiple cash flows? A) Compound the accumulated Balance forward one year at a time. B) Discount all the cash flows back to year 0. C) Calculate the future value of each cash flow first then add them up. D) Find the future value of a single lump sum ammount

A & C Compound the accumulated balance forward one year at a time. Calculate the future value of each cash flow first then add them up.

C/r is the formula for the present value of a(n). A) Perpetuity B) Growing Annuity C) Growing Perpetuity D) Annuity

A) Perpetuity

An interest rate expressed in terms of the interest payment made each period is called a(n). A) Stated Interest Rate B) Annual percentage rate. C) Quoted interest rate D) Effective annual rate

A) Stated Interest Rate & C) Quoted Interest Rate

The general formula for _________ is (1+quoted rate/m)^m -1 A) The APR B) The EAR C) The SAIR

B) The EAR (Effective Annual Rate)

Assume $100 earns a stated 10% rate compounded quarterly. What will the value of the $100 be after 1 year. A) 110.40 B) 104.00 C) 110.38 D)102.50

C) 110.38

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

Tradition and legislation

Spreadsheet Functions used to calculate the present value of multiple cash flows, assume by default that all cash flows occur at the A) Beginning B) End C) Middle D) Spread Evenly over the period

B) End

For a stated positive interest rate, the EAR is always _________ the APR. A) Equal to B) Equal to or greater than. C) Less than D) Equal to or less than. E) Greater than

B) Equal to or greater than.

Amortization is the process of paying off loans by regularly reducing the. A) Interest rate B) Life of loan C) Principal D) Payment Frequency

B) Principal

The first cash flow at the end of the week is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of the year 3 is $100. This cash flow pattern is a(n)_________ type of cash flow. A) Uneven B) Perpetuity C) Gratuity D) Annuity

A) Uneven

Which of the following is a perpetuity? A) A growing stream of cash flows for a fixed period. B) A constant stream of cash flows forever. C) A constant stream of cash flows for a fixed period. D) A undulating stream of cash flows forever.

B) A constant stream of cash flows forever.

If the quoted interest rate is 2% per month (APR = 24%), what is the EAR? A) 24% B)126.82% C) 26.82% D) 124%

C)26.82% 1.02^12

Assume Interest is compounded monthly. The __________ rate will express this rate as though it were compounded annually.

Effective Annual Rate

Suppose you expect to receive $5000 in one year, $4300 more in 2 years and an additional $5000 in 3 Years. Match each present value amount to the corresponding cash flow. Assume a discount rate of 17%

5000/1.17 = $4273.50 4300 / (1.17)^2 = $3141.21 5000/(1.71)^3 = $3121.85

When entering variables in an Excell function (or in a financial calulator) 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. A) Future Value B) Number of Periods C) Interest Rate D) Payment E) Present Value

A) Future Value D) Payment E) Present Value

An ordinary annuity consists of a(n) _________ stream of cash flows for a fixed period of time. A) Level B) Infinite C) Random D) Uneven

Level

Which of the following is the simplest form of loan? A) An interest only loan. B) A pure discount loan. C) A partially amortized loan. D) An amortized loan.

B) A pure discount loan.

Which of the following could not be evaluated as annuities or annuities due? A) Monthly Rent within a lease B) Monthly electric bills C) Installment Loan Payments D) Tips to a waiter

B) Monthly Electric Bills C) Tips to a Waiter

The present value of an annuity is equal to the present value of a(n) ________ annuity multiplied by (1+r). A) Actual B) Ordinary C) Middle D) Deferred

B) Ordinary

Which of the following ways to amortize a loan? A) Pay only interest every period and pay off the principal at maturity. B) Pay principal and interest every period in a fixed payment. C) Pay the interest each period plus some fixed amount of the principal. D) Pay both interest and principal in one lump sum at maturity.

B) Pay principal and interest every period in a fixed payment. C) Pay the interest each period plus some fixed amount of the principal.

An annuity due is a series of payments that begin. A) 1 year in the past B) 1 Year hence C) At the beginning of each period D) Any time in the future.

C) At the beginning of each period

Which is not a way to amortize a loan? A) Interest + Fixed Ammount B) Fixed Payments C) Fixed Interest Payments Only

C) Fixed Interest Payments Only

The original ammount of a loan is termed the loan. A) Current Balance B) Outstanding Balance C) Principal

C) Principal

What is the present value of a perpituity paying $150 at the end of each year at 8%. A) 2000 B) 2875 C) 2500 D) 1875

D) 1875