Finance 450 Midterm II

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 formula below represents a present value factor?

1/(1 + r)^t

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

Annual

Future value is the________ value of an investment at some time in the future.

Cash

The idea behind ______ is that interest is earned on interest.

Compounding

How frequently does continuous compounding occur?

Every instant

The future value of $100 invested today for 3 years at 10% per year?

FV = $100 × (1.10)^3

The present value of a series of ______ cash flows is the amount you would need today to exactly duplicate those future cash flows.

Future

Most investments involve _____ cash flows.

Multiple

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

Partial

A constant stream of cash flows forever

Perpetuity

True about a growing annuity?

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

Why is a dollar received today worth more than a dollar received in the future?

Today's dollar can be reinvested, yielding a greater amount in the future.

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

end

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

higher EARs

A single cash flow is also known as a:

lump sum

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

payments are mostly interest

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

repaid at some point in the future

The discount rate is also called the rate of

return

When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.

the same

Examples of Annuities

-Monthly Rent payments in a lease -Installment loan payments

Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?

=NPER(0.06,0,−6000,10000)

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

Infinite

If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.

Present

The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.

Simple Bigger

Interest earned on the original principal amount invested is called _____.

Simple Interest

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

exactly duplicate those future cash flows

A growing annuity has a(n) ____.

finite number of growing cash flows