FINN CH. 4 & 5
Which of the following best describes the structure of an annuity?
A series equal payments to be received at a common interval during a period of time.
True or false? If a bank compounds interest on savings accounts quarterly, the stated annual interest rate (sometimes called the APR) will exceed the effective annual interest rate.
FALSE
True or false? If the discount (or interest) rate is positive, the present value of a series of expected cash flows will always exceed the future value of the same series.
FALSE
By increasing the number of compounding periods in a year, while holding the stated annual interest rate constant, you will....
Increase the effective annual rate.
Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual interest rate for all investments is the same and is greater than zero.
Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
You plan to analyze the value of an ordinary annuity investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? Assume a positive interest rate.
Reducing the size of the annual payments by half (e.g., reducing the annual payment from $100 to $50) while doubling the number of annual payments (e.g., doubling the number of annual payments from 10 to 20).
Which of the following statements is TRUE? Statement I: The future value of a lump sum and the future value of an annuity will both increase as you increase the interest rate. Statement II: As you increase the length of time from now until the time of receipt of a lump sum, the present value of the lump sum increases. Statement III: The present value of a lump sum to be received at some point in the futuredecreases as you increase the interest rate, but the present value of an annuity increases as you increase the interest rate.
Statement I only.
True or false? If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value.
TRUE
Which of the following statements is CORRECT?
The cash flows for an ordinary annuity remain constant from period to period and they occur at the end of each period.
Which of the following cannot be calculated?
The future value of a perpetuity at the end of its life.
Your bank account pays a 6% stated annual interest rate (or APR). The interest is compounded quarterly. Which of the following statements is CORRECT?
The quarterly interest rate is 1.5% and the effective annual interest rate is greater than 6%.