Finc ch4 and 5
If the first payment in an annuity occurs at the beginning of the period, then it is an ordinary annuity.
F
An annuity is an infinite series of equal payments.
F
For a given (positive) interest rate, the future value is always less than the present value.
F
What is an amortized loan? What is a good example of an amortized loan
An amortized loan pays principle and interest with each payment Traditional home loans are good examples of these loansCar loans and student loans are other good examples
What is an interest only loan? What is a good example of an interest only loan?
An interest only loan does not pay any principal along the way (only interest). All of the principal is paid at the end of the load. Corporate bonds are good examples of these type of loans.
For a given positive interest rate, the longer the time period, the larger the present value.
F
An annuity is a perpetuity that never matures.
F
A traditional home mortgage is an example of a pure discount loan.
F
If you have a given amount of money that you want to double, the higher the interest rate, the more time you will have to wait.
F
One percent per month is the same as twelve percent per year.
F
The effective annual rate (EAR) does not take into account the effect of compounding.
F
You should use the APR (as opposed to the EAR) when comparing alternative investments or loans.
F
A pure discount loan does not pay interest, only principal at the end.
T
For a given period of time, the larger the interest rate, the lower the present value, all else equal.
T
For a given time period, future value increases as the interest rate increases, all else equal.
T
If you have money in a bank, you would always prefer that they compound a given rate as opposed to their using simple interest with the same rate.
T
Interest rates can be thought of as the 'exchange rate' between earlier money (on a time line) and later money.
T
The annual percentage rate (APR) is the rate required to be quoted by law.
T
To find a present or future value when you have monthly cash flows, you need a monthly interest rate.
T
When choosing between the APR, EAR, and the period rate, you use the period rate in all time value of money calculations.
T
With positive interest rates, an investment yielding 5% with compounding will always give you at least as much as the same investment with 5% simple interest.
T
You would expect the EAR to be at least as big as the APR for compounding periods of a year or less.
T
When might you want to compute the number of periods
To calculate how long it will take you to be able to purchase a given item
What are some situations where you might want to compute the implied interest rate
To compare different investment opportunities. To compute how much an investment must earn to reach a target amount in a fixed number of years.
