Finance 2000 chapter 6 Chapter questions

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%? Multiple choice question.

$5,000/1.03

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

Which of the following is a perpetuity?

A constant stream of cash flows forever

Which of the following is the simplest form of loan?

A pure discount loan

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

Annual

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

Outflow, Inflow

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

The U.S. government borrows money by issuing:

Treasury bonds, and treasury notes, treasury bills

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

Treasury notes Treasury bonds

Semiannual compounding means that interest is paid ______ per year.

Two times

Which shape does the term structure of interest rates usually have?

Upward sloping

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

annual

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

annual

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

annuity

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

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

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

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

due

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

end

n 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

True or false: There is only one way to quote interest rates.

false

A growing annuity has a(n) ____

finite number of growing cash flows

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

higher EARs

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

infinite

If the term structure of interest rates is upward sloping, then ____. Multiple choice question.

long-term rates are higher than short-term rates

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

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

partial

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

payments are mostly interest

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

present

The original loan amount is called the _____.

principal

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

repaid at some point in the future

Interest paid twice a year is known as ______ compounding. Multiple choice question.

semiannual

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

tradition; legislation

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

true

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