Chapter 6 Learn

The loan balance on partial amortization loans declines so slowly because the ___.

payments are mostly interest

Amortization is the process of paying off loans by regularly reducing the _________.

principal

The original loan amount is called the _____.

principal

Interest paid twice a year is known as ______ compounding.

semiannual

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

[1 − (1/1.0820)]/.08

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then:

paid off in a lump sum bullet payment.

The payments in a Blank______ amortization loan are NOT based on the life of the loan.

partial

______ is the process of paying off loans by regularly reducing the principal.

amortization

The _____ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.

annual

A growing annuity has a(n) ____.

finite number of growing cash flows

Most investments involve _____ cash flows.

multiple

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.

one year

An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.

semiannually

Which of the following payment methods amortizes a loan?

Interest plus fixed amount Fixed payments that result in a zero loan balance

Because of __________ and _________, interest rates are often quoted in many different ways.

tradition; legislation

An annuity due is a series of payments that are made ____.

at the beginning of each period

The present value of a series of future cash flows is the amount you would need today to _____.

exactly duplicate those future cash flows

The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]r}1-[1/(1+r)t]r.

present

Semiannual compounding means that interest is paid ______ per year.

two times

Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year?

$100{[1 − (1/(1.10)3)]/0.10}

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

Which of the following are annuities?

-Installment loan payments -Monthly rent payments in a lease

Which of the following is equal to an effective annual rate of 12.36 percent?

12%, compounded semiannually

The formula for the present value interest factor for annuities is: Annuity present value factor = {1-[1/(1+r)t]}r1-[1/(1+r)t]r.

true

Which of the following is the simplest form of loan?

A pure discount loan

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

FV = C((1+r)t−1r)

Which of the following are true about a partial amortization loan?

The monthly payments do not fully pay off the loan by the end of the loan period. The borrower makes a large balloon payment at the end of the loan period. The monthly payment is based on a longer amortization period than the maturity of the loan. The amortization period is longer than the loan period.

Given the same APR, more frequent compounding results in _____.

higher EARs

The loan balance on _____________ amortization loans declines so slowly because the payments are mostly interest.

partial

With interest-only loans that are not perpetuities, the entire principal is _____.

repaid at some point in the future

Which of the following is a perpetuity?

A constant stream of cash flows forever

Which of the following is true about a growing annuity?

The cash flows grow at a constant rate. The cash flows grow for a finite period.

EAR

The interest rate stated as though it were compounded once per year.

Which compounding interval will result in the lowest future value assuming everything else is held constant?

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

The present value of a(n) _____ of C dollars per period for t periods when the rate of return or interest rate, r, is given by: C × (1 − [1/(1 + r)t]r/)

annuity

APR

The interest rate per period multiplied by the number of periods in the year.

A single cash flow is also known as a:

lump sum

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

Which of the following processes can be used to calculate future value for multiple cash flows?

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: There is only one way to quote interest rates.

False

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

Pensions Mortgages

The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______.

[1 − (1/1.1030)]/.10]

_______ is the process of paying off loans by regularly reducing the principal.

amortizing

An annuity _____ is an annuity for which the cash flows occur at the beginning of each period.

due

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

end

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

How frequently does continuous compounding occur?

every instant

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.

infinite

The most common way to repay a loan is to pay:

interest plus a fixed principal amount every period

When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.

lump

A typical investment has a large cash _________ (inflow/outflow) at the beginning and then a cash _________ (inflows/outflows) for many years.

outflow, inflow

What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?

$100{[1 - (1/(1.10)20)]/0.10}