Business Finance Chapter 5

$100 at the end of each year forever at 10 percent per year is worth how much today?

$1,000

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

$1,875

Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of thee $100 be after one year?

$110.38

The future value of an annuity due of $100 per year for 10 years at 10% per year is

$1753.12

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

9.4269

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is

9.8181

Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?

EAR= (1+quoted rate/m)^m - 1

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

Leases, mortgages, pensions

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)

Which of the following is the formula for the future value of an annuity factor?

[(1+r)^t - 1]/r

An interest rate expressed in terms of the interest payment made each period is called a(n) _____

stated interest rate, quoted interest rate

You agree to repay $1,200 in 2 weeks for a $1,000 payday loan. What is your EAR assuming that there are 52 weeks in a year?

11,347.55%

Assume a $100 investment earns a stated interest rate of 10 percent, compounded monthly. What will be the investment value after one year?

110.47 (FV=100x(1+.10/12)^12)

You agree to pay back $1,100 in 4 weeks for a $1,000 payday loan. Your annual percentage rate (APR) to two decimal places is _____%. (Assume 52 weeks in a year.)

130.00

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

26.82%

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 _____ and multiply it by _____

6.1446; $100

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

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

level

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

original loan amount

Which of the following are ways to amortize a loan?

pay the interest each period plus some fixed amount of the principle, pay principle and interest every period in a fixed payment.

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

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?

$402.11

Suppose you paid off a $1,200 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

Suppose you borrow $1,000 at 5% interest per year for 10 years. The loan is an interest only loan so each year you will pay

$50

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

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

What is the present value of an annuity that makes payments of $100 per year for ten years if the first payment is made immediately and the discount rate is 10 percent per year?

$675.90

The formula for the present value of an annuity due is

(1+r) x (PV of an ordinary annuity)

Which of the following Excel functions will result in the correct answer for the following annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8%. How much will you have in this annuity?

=FV(.08,10,-100,0)

Which of the following is a perpetuity?

A constant stream of cash flows forever

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.

end

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

fixed interest payments only

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)

Suppose you expect to receive $5,000 in one year, $4,300 more in two years, and an additional $5,000 in three years. Match each present value amount to the corresponding cash flow assuming a discount rate of 17%.

Present value of the year 1 cash flow: 4,273.50 Present value of the year 2 cash flow: 3,141.21. Present value of the year 3 cash flow: 3,121.85

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)

An annuity due is a series of payments that begin

at the beginning of each period

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

compounding

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 that outflows are negative values; inflows are positive values. For which variables is this a consideration?

payment, future value, present value

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

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

present

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 that outflows are negative values; inflows are positive values. For which variables is this a consideration?

present value, future value, payment

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

Which of the following could not be evaluated as annuities or annuities due?

tips to a waiter, monthly electric bills

Because of _____ and _____, interest rates are often quoted in many ways

tradition; legislation