Discounted Cash Flow Valuation Quiz - Chapter 6

Which one of the following statements related to annuities and perpetuities is correct? - Perpetuities are finite but annuities are not - the present value of a perpetuity cannot be computed, but the future value can - an ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7% interest, compounded annually - most loans are a form of a perpetuity - A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12%, compounded monthly

A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12%, compounded monthly

Which one of the following statements concerning interest rates is correct? The effective annual rate decreases as the number of compounding periods per year increases. - For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate. - The effective annual rate equals the annual percentage rate when interest is compounded annually. - Borrowers would prefer monthly compounding over annual compounding. - Savers would prefer annual compounding over monthly compounding.

The effective annual rate equals the annual percentage rate when interest is compounded annually.

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates? - consolidated monthly rate - discounted annual rate - effective annual rate - stated rate - periodic monthly rate

effective annual rate (EAR)

Which one of the following statements correctly states a relationship? - Time and present value are inversely related, all else held constant. - Interest rates and time are positively related, all else held constant. - Time and future values are inversely related, all else held constant. - An increase in the discount rate increases the present value, given positive rates. - An increase in time increases the future value given a zero rate of interest.

Time and present value are inversely related, all else held constant

What is the interest rate charged per period multiple by the number of periods per year called? - compounded interest rate - daily interest rate - effective annual rate - annual percentage rate - periodic interest rate

annual percentage rate (APR)

Which one of the following terms defines as a loan wherein the regular payments, including both interest and principle amounts, are insufficient to retire the entire loan amount, which then must be repaid in one Lump sum? - amortized loan - remainder loan - interest only loan - continuing loan - balloon loan

balloon loan

Which one of the following terms is used to identify a British perpetuity? - discounted loan - annuity due - amortized cash flow - ordinary annuity - consol

consol

An ordinary annuity is best defined by which one of the following? - unequal payments that occur at set intervals for a limited period of time - increasing payments paid forever - equal payments paid at regular intervals over a stated time period - equal payments paid at regular intervals of time on an ongoing basis - increasing payments paid for a definitive period of time

equal payments paid at regular intervals over a stated time period

Which one of the following terms is used to describe a loan that calls for periodic interest payments and lump sum principle payment? - balloon loan - interest only loan - amortized loan - modified loan - pure discount loan

interest only loan

An amortized loan: - requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term - repays both the principal and the interest in one lump sum at the end of the loan term - requires the principal amount to be repaid in even increments over the life of the loan - requires that all payments be equal in amount and include both principal and interest - may have equal or increasing amounts applied to the principal from each loan payment

may have equal or increasing amounts applied to the principal from each loan payment

The entire repayment of which one of the following loans is computed simply by computing a single future value? - balloon loan - pure discount loan - amortized loan - interest only loan - bullet loan

pure discount loan

The interest rate that is quoted by a lender is referred to as which one of the following? - simple rate - stated interest rate - compound rate - effective annual rate - common rate

stated interest rate

Which of the following accurately defines a perpetuity? - unending equal payments paid at either equal or unequal time intervals - varying amounts that are paid at even intervals forever - a limited number of equal payments paid in even time increments - unending equal payments paid at equal time intervals - payments of equal amounts that are paid irregularly but indefinitely

unending equal payments paid at equal time intervals