FIN 331 Ch. 6

The original loan amount is called the

principal

Interest paid twice a year is known as ___ compounding.

semiannual

Use your financial calculator to find the future value of $400 for 10 years at 5%.

$5,031.16

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

12%, compounded semiannually

You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, how many months will it take to pay off your credit card?

30 months

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

9.8181

What are two ways to calculate a balloon payment?

Amortize the loan over the loan life to find the ending balance; find the present value of the payments remaining after the loan term

Which of the following are annuities?

Monthly rent payments; installment loan payments

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

Which of the following are true about the amortization of a fixed payment loan?

The principal amount paid increases each period; the amount of interest paid decreases each period

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

compounding

When finding the present value of an annuity using a spreadsheet (Excel), the interest rate should be entered as a ___.

decimal

A growing annuity has a(n) ___

finite number of growing cash flows

A single cash flow is also known as a

lump sum

Most investments involve

multiple cash flows

C/r is the formula for the present value of a(n) ___.

perpetuity

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

tradition; legislation

The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) ___ type of cash flow.

uneven

Another common name for the effective annual rate is the annual percentage ___

yield

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

$1,000

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

A credit card charges 1.5 percent interest each month. What is the EAR?

19.56%

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

Which of the following are ways to amortize a loan?

Pay the interest each period plus some fixed amount of the principal; pay principal and interest every period in a fixed payment

In the Excel setup of a loan amortization problem, which of the following occurs?

The payment is found using PMT (rate, -pv, fv); to find the principal payment each month, you subtract the interest payment from the total payment

At the end of 5 days, you repay your $1,000 loan plus $50 in interest. What is the EAR?

3,422.24%

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

You are considering an investment that will earn the following cash flows over the next three years. You expect to earn 6% return on the investment. Match each cash flow with its present value, then match the total amount you should pay for the investment today to the appropriate box. Year 1 Year 2 Year 3 Amount you should pay for the investment

$4,716.98; 5,339.98; 4,617.91; 14,674.87

You expect to receive bonuses with your job each year for the next five years. Assume you can invest all of your bonuses at 4.5%, and the bonuses are as shown, match each amount to its future value at the end of the five years, then match the total to the appropriate box. Year 1: $500 Year 2: $1,200 Year 3: $1,000 Year 4: $2,400 Year 5: $2,200

596.26; 1,369.40; 1,092.03; 2,508.00; 2,200.00; 7,765.68

You have decided to fund an account that will pay your descendants the inflation-adjusted equivalent of $100 per year forever. You assume inflation will equal 3% per year, and you expect the account to earn 7% per year. How much do you need to put in the account today to ensure your gift will continue forever?

$2,500

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

$248.69

Suppose you need $5,000 in one year, $4,300 in two years, and $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 Present value of the Year 2 Cash Flow Present value of the Year 3 Cash Flow

$4,273.50; $3,141.21; $3,121.85

Amy took out a mortgage of $100,000 at 4.5% with monthly payments for 30 years. What is her payment to principal and interest each month?

$506.69

You agree to pay back $1,100 in 4 weeks for a $1,000 payday loan. Your annual percentage rate (APR) rounded to two decimal places is ___%. (Assume weekly compounding and assume that there are 52 weeks in a year).

125.39

You are planning to buy a CD for $1,352. You will receive $1,500 in 2 years. Use a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding.

5.33%

Match the type of rate with its definition APR EAR

APR= the interest rate per period multiplied by the number of periods in the year EAR= the interest rate stated as through it were compounded once per year

Which of the following payment methods amortizes a loan?

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

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

Mortgages; pensions

Which of the following is 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 amortization period is longer than the loan period

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

a consol; preferred stock; cash flows from a product whose sales are expected to remain constant forever

The most common way to repay a loan is to pay ___.

a single fixed payment every period

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

end

The present value of an annuity due is equal to the present value of a(an) ___ annuity multiplied by (1+r).

ordinary