Ch. 5

11. Which one of the following is the annuity present value formula? A. C × {{1 - [1/(1 + r)t]}/r} B. C × {1 - [1/(1 + r)t]} - r C. C × {1 - [r/(1 + r)t]}/r D. C × {{1 - [1/(1 × r)t]} × r} E. C × {1 - [r/(1 × r)t]} × r

A. C × {{1 - [1/(1 + r)t]}/r}

4. A perpetuity in Canada is frequently referred to as which one of the following? A. Consul B. Infinity C. Forever cash D. Dowry E. Forevermore

A. Consul

30. Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have? A. Interest-only B. Pure discount C. Compound D. Amortized E. Complex

A. Interest-only

33. You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain? A. Interest-only B. Amortized C. Perpetual D. Pure discount E. Lump sum

A. Interest-only

16. Which of the following characteristics apply to a perpetuity? I. Constant cash flow dollar amount II. Unequal cash flow dollar amount III. Limited time period IV. Infinite time period A. I and III only B. I and IV only C. II and III only D. II and IV only E. I plus either III or IV

B. I and IV only

28. Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n): A. interest-only loan. B. pure discount loan. C. quoted rate loan. D. compound interest loan. E. amortized loan.

B. pure discount loan.

29. Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this? A. Principal-only B. Amortized C. Interest-only D. Compound E. Pure discount

E. Pure discount

31. Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have? A. Amortized B. Blended discount C. Interest-only D. Pure discount E. Complex

A. Amortized

32. Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have? A. Amortized B. Complex C. Pure discount D. Lump sum E. Interest-only

A. Amortized

12. Which one of the following is an example of a perpetuity? A. Trust income of $1,200 a year forever B. Retirement pay of $2,200 a month for 20 years C. Lottery winnings of $1,000 a month for life D. Car payment of $260 a month for 60 months E. Apartment rent payment of $800 a month for one year

A. Trust income of $1,200 a year forever

7. Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the: A. annual percentage rate. B. compounded rate. C. effective annual rate. D. perpetual rate. E. simple rate.

A. annual percentage rate.

14. Which one of the following statements concerning annuities is correct? A. The present value of an annuity is equal to the cash flow amount divided by the discount rate. B. An annuity due has payments that occur at the beginning of each time period. C. The future value of an annuity decreases as the interest rate increases. D. If unspecified, you should assume an annuity is an annuity due. E. An annuity is an unending stream of equal payments occurring at equal intervals of time.

B. An annuity due has payments that occur at the beginning of each time period

1. Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms? A. Perpetuity B. Annuity C. Consol D. Lump sum E. Factor

B. Annuity

2. Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments? A. Ordinary annuity B. Annuity due C. Consol D. Ordinary perpetuity E. Perpetuity due

B. Annuity due

21. Which one of the following cannot be computed? A. Future value of an ordinary annuity B. Future value of a perpetuity C. Present value of a perpetuity D. Present value of an annuity due E. Present value of an ordinary annuity

B. Future value of a perpetuity

17. Which of the following will increase the present value of an annuity, all else held constant? I. Increase in the number of payments II. Increase in the interest rate III. Decrease in the interest rate IV. Decrease in the payment amount A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. I, III, and IV only

B. I and III only

You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options? A. To be the perpetuity, the payments must occur on the first day of each monthly period. B. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years. C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due. D. The future value of all three investments must be equal. E. The present value of all three investments must be equal.

C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

27. A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must: A. have a one-year term. B. have a zero percent interest rate. C. charge interest annually. D. must be an interest-only loan. E. require the accrued interest be paid in full with each monthly payment.

C. charge interest annually.

23. Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semiannually C. 6 percent compounded quarterly D. 6 percent compounded monthly E. All the other answers have the same effective annual rate.

D. 6 percent compounded monthly

10. Which one of the following statements is true concerning annuities? A. All else equal, an ordinary annuity is more valuable than an annuity due. B. All else equal, a decrease in the number of payments increases the future value of an annuity due. C. An annuity with payments at the beginning of each period is called an ordinary annuity. D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. E. All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

18. You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information? A. The present value of Annuity A is equal to the present value of Annuity B. B. Annuity B will pay one more payment than Annuity A will. C. The future value of Annuity A is greater than the future value of Annuity B. D. Annuity B has both a higher present value and a higher future value than Annuity A. E. Annuity A has a higher future value but a lower present value than Annuity B.

D. Annuity B has both a higher present value and a higher future value than Annuity A.

15. Which one of the following qualifies as an annuity? A. Weekly grocery bill B. Clothing purchases C. Car repairs D. Auto loan payment E. Medical bills

D. Auto loan payment

13. Which one of the following can be classified as an annuity but not as a perpetuity? A. Increasing monthly payments forever B. Increasing quarterly payments for six years C. Unequal payments each year for nine years D. Equal annual payments for life E. Equal weekly payments forever

D. Equal annual payments for life

3. The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms? A. Ordinary annuity B. Annuity due C. Amortized payment D. Perpetuity E. Continuation

D. Perpetuity

9. Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? A. The present value of the car is equal to $500 + (36 × $450). B. The $500 is the present value of the purchase. C. The car loan is an annuity due. D. To compute the initial loan amount, you must use a monthly interest rate. E. The future value of the loan is equal to 36 × $450.

D. To compute the initial loan amount, you must use a monthly interest rate.

5. The stated interest rate is the interest rate expressed: A. as if it were compounded one time per year. B. as the quoted rate compounded by 12 periods per year. C. in terms of the rate charged per day. D. in terms of the interest payment made each period. E. in terms of an effective rate.

D. in terms of the interest payment made each period.

20. Which one of the following is an ordinary annuity, but not a perpetuity? A. $75 paid at the beginning of each monthly period for 50 years B. $15 paid at the end of each monthly period for an infinite period of time C. $40 paid quarterly for 5 years, starting today D. $50 paid every year for ten years, starting today E. $25 paid weekly for 1 year, starting one week from today

E. $25 paid weekly for 1 year, starting one week from today

8. Which one of the following will decrease the present value of an annuity? A. Increase in the annuity's future value B. Increase in the payment amount C. Increase in the time period D. Decrease in the discount rate E. Decrease in the annuity payment

E. Decrease in the annuity payment

26. Which one of the following statements is correct? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. D. The APR is the best measure of the actual rate you are paying on a loan. E. The EAR, rather than the APR, should be used to compare both investment and loan options.

E. The EAR, rather than the APR, should be used to compare both investment and loan options.

19. Which one of the following features distinguishes an ordinary annuity from an annuity due? A. Number of equal payments B. Amount of each payment C. Frequency of the payments D. Annuity interest rate E. Timing of the annuity payments

E. Timing of the annuity payments

6. Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the: A. annual percentage rate. B. compounded rate. C. quoted rate. D. stated rate. E. effective annual rate.

E. effective annual rate.

24. When comparing savings accounts, you should select the account that has the: A. lowest annual percentage rate. B. highest annual percent rate. C. highest stated rate. D. lowest effective annual rate. E. highest effective annual rate.

E. highest effective annual rate.

25. A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent.

E. will be greater than 12.9 percent.