FIN 311 ch6

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Which of the following should be valued using a perpetuity formula?

A consol (bond that pays interest only and does not mature) Cash flows from a product whose sales are expected to remain constant forever Preferred stock

Which of the following is a perpetuity?

A constant stream of cash flows forever

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

Annual

Which of the following are annuities?

Installment loan payments Monthly rent payments in a lease

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

Pensions Mortgages

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.

The US government borrows money by issuing:

Treasury bonds Treasury bills Treasury notes

The _________ future value factor is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.

annuity

The formula for the ________ present value is C × [(1 − Present value factor)/r].

annuity

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

annutity due

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

at the beginning of each period

When calculating the future value of multiple cash flows using a spreadsheet, you must:

calculate the future value of each cash flow then add the compounded values together

How frequently does continuous compounding occur?

every instant

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

higher EARs

Most investments involve _____ cash flows.

multiple

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

outflow, inflows

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

semiannually For continuous compounding, EAR=e0.07-1=7.251%. For semiannual compounding, EAR = (1 + 0.07/2)2 - 1 = 7.12%

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

tradition; legislation

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

Semiannual compounding means that interest is paid ______ per year.

two times

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

annual

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

one year

In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years.

2 to 30

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

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

APR

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

EAR

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

When calculating the present value of multiple cash flows using a spreadsheet, you must:

calculate the present value of each cash flow then add the discounted values together

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

A growing annuity has a(n) ____.

finite number of growing cash flows

A perpetuity is a constant stream of cash flows for a(n) ______ period of time.

infinite

When the U.S. government wants to borrow money for the long-term (more than one year) it issues:

Treasury notes Treasury bonds

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

end


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