Financial Management LS Chapter 6

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

APR (annual percentage rate)

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

EAR (effective annual rate)

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

annual

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

at the beginning of each period

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

effective

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

end

A traditional (non-growing) annuity consists of a _______ stream of cash flows for a fixed period of time.

level/constant

A single cash flow is also known as:

lump sum

Which of the following are real world examples of annuities?

mortgages & pensions

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then ______.

paid off in a lump sum bullet payment

What are the two ways to calculate a balloon payment?

1) find the present value of the payments remaining after the loan term 2) amortize the loan over the life to find the ending balance

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

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

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

ordinary

Which of the following are true about a partial amortization loan?

1) the borrower makes a large balloon payment at the end of the loan period. 2) the amortization period is longer than the loan period

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

1) the principal amount paid increases each period 2) the amount of interest paid decreases each period

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

1) compound the accumulated balance forward one year at a time 2) calculate the future value of each cash flow first and then add them up

Which is true about a growing annuity?

1) the cash flows grow at a constant rate 2)the cash flows grow for a finite period

The present value formula for a ______ is PV= C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

perpetuity

Amortization is the process of paying off loans by regularly reducing the ________.

principal

The original loan amount is called:

principal

Which of the following is the simplest form of loan?

pure discount loan

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.

semi-annual

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

1) to find the principal payment each month, you subtract the interest payment from the total payment. 2) the payment is found using PMT

Which is greater, the APY or EAR?

they are the same

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

tradition, legislation

Which of the following payment methods amortizes a loan?

interest plus fixed amount fixed payments that result in a zero loan balance

For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always _____ the APR.

larger than

Most investments involve:

multiple cash flows