Finance Ch. 1, 4, 5

$50 as 1000x0.05=50

Suppose you borrow $1,000 at 5% interest per year for 10 years. The loan is an interest only loan so each year you will pay _____.

PV=FV/(1+r)

If FV=PVx(1+r) is the single period formula for future value, which of the following is the single period present value formula?

Discounted Cash Flow

Calculating the present value of a future cash flow to determine its worth today is commonly called _____ valuation.

$402.11 Calculation: 1000/[(1-1/1.10^3)/0.10

Ralph has $1,000 in an account that pays 10% 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?

$61.45 The difference is PV(annuity due - PV(ordinary annuity), or $675.90-$614.46=61.45

The difference between the present value of an ordinary annuity with payments of $100 per year at 10% compounded annually for 10 years and an annuity due with payments of %100 per year at 10% compounded annually for 10 years is:

Table 4.2 Pg. 101

Using a time value of money table, what is the future value of interest factor for 10% for 2 years?

[(1+r)^t-1]/r

What is the formula for the future value of an annuity factor?

130.00 [(1100/1000)-1]x(52/4)(100)

You agree to pay back $1,100 in 4 weeks for a $1,000 payday loan. Your annual percentage rate (APR) to two decimal places is _____%. (Assume 52 weeks in a year.)

11,347.55% 1,200/1,000)^26-1

You agree to repay $1,200 in 2 weeks for a $1,000 payday loan. What is your EAR assuming that there are 52 weeks in a year?

260%

You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2-week period. What is your stated annual interest rate?

annuity due

An annuity with payments beginning immediately rather than at the end of the period is called an _____.

quoted or stated interest rat

An interest rate expressed in terms of the interest payment made each period is called a(n) _____

level

An ordinary annuity consists of a(n) _____ stream of cash flows for a fixed period of time.

$110.47 FV=$100x(1+0.10/12)^12

Assume a $100 investment earns a stated interest rate of 10%, compounded monthly. What will be the investment value after one year?

effective

Assume interest is compounded monthly. The _____ annual rate will express this rate as though it were compounded annually.

perpetuity

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

$133.1 100x(1.1^3)

If you invest $100 at 10% compounded annually, how much money will you have at the end of 3 years?

higher EARs

More frequent compounding leads to:

PV=FV/(1+r)^t

The basic present value equation is:

Effective annual rate

The interest rate expressed as if it were compounded once per years is called the _____.

=PV(0.10,10,-100,0,0)

Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?

$600; $605. Simple interest formula: 500(0.10)=$50 per year. Times two years = $100 total. Adding the original principal yields $600. With compound interest, the total is $500(1.10)^2=$605. The FV will always be higher with compound interest.

You invest $500 at 10% interest per annum. At the end of 2 years with simple interest you will have __ and with compound interest you will have __.

Principal

Amortization is the process of paying off loans by regularly reducing the _____

5000/1.17 = $4,273.5 for year 1 4,300/(1.17)^2 = $3,141,21 for year 2 5000/(1.17)^3 = $3,121.85 for year 3

Suppose you expect to receive $5,000 in one year, $4,300 more in two years, and an additional $5,000 in three years. Match each present value amount to the corresponding cash flow assuming a discount rate of 17%

Compounding

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

original loan amount

The entire principal of an interest-only loan is the:

Mortgages, preferred stock dividends, leases, pensions

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

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

Which of the following are ways to amortize a loan?

Sales growth, population growth, and dividend growth.

Which of the following can be determined using the future value approach to compound growth developed in this chapter?

EFFECT(0.12,4)

Which of the following is the appropriate Excel function to convert a quoted rate of 12% compounded quarterly to an EAR?

FV = $100 x (1.10)^3

Which of the following is the correct mathematical calculation of the future value of $100 invested today for 3 years at 10% per year?

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

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

(1000/100)^(1/10)-1

Suppose the present value is $100, the future value is $1,000, and t is 10 years. Which formula below is used to find the (decimal) interest rate?

$1,753.12 Calculation: 100[(1.10^10-1)/0.10][1.10]

The future value of an annuity due of $100 per year for 10 years at 10% per year is:

the EAR

The general formula for _____ is (1+quoted rate/m)^m-1

The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?

Monthly electric bills and tips to a waiter

Which of the following could not be evaluated as annuities or annuities due?

$80 1200-400 = 800. 800x10% = 80

Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10% yearly interest. How much is the second interest payment?

$136.05 Which is $100 x 1.08^4

The future value of a $100 investment in 4 years compounded at 8% per year equals

26.82%

If the quoted interest rate is 2% per month (APR=24%), what is the EAR?

$1,000 Calculation: 100/0.10

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

tradition and legislation

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

present

The formula for the _____ value interest factor of an annuity is: [1-1/1+r)^t]/r.

$1,593.74 Calculation: 100x[1.10^10-1]/0.10

Find the future value of an annuity of $100 per year for 10 years at 10% per year.

the reciprocal of and 1 divided by Formula: future value factor = (1+r)^t Present value factor = 1/(1+r)^t

For a given time period (t) and interest rate (r), the present value factor is _____ the future value factor

Take 1.05^22.5 to get 3. 3 times whatever the number being worked is triple.

If a firm's sales are growing at 5% per year, how long will it take for the firm's sales to triple?

0.3855 Take 1/(1+0.10)^10

If the interest rate is 10% per year and there are 10 years, what is the present value discount factor?

pure discount loan

If you borrow $15,000 at 5% annual interest to be repaid in one year as a lump sum, this is termed a _____.

Present

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

To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. Also, the payment is found with =PMT(rate, nper, -pv, fv).

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

end

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the _____ of the period.

9.8181

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

19.56% Calculation: (1.015)^12-1

A credit card charges 18% interest per year (APR) (1.5% each month). What is the EAR?

infinite

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

ordinary

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

6.1446; $100

To find the present value of an annuity of $100 per year for 10 years at 10% per year using the tables, find a present value factor of _____ and multiply it by _____.

{1-[1/(1+r)]}/r

What is the formula for the present value interest factor for an annuity?

present value, payment, future value

When entering variables in an Excel function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?

=FV(.08,10,-100,0)

Which of the following Excel functions will result in the correct answer for the following annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8%. How much will you have in this annuity?