BA 323- Ch.5

Which of the following are ways to amortize a loan?

1. Pay principal and interest every period in a fixed payment. 2. Pay the interest each period plus some fixed amount of the principal.

Which of the following processes can be used to calculate the future value of 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 the up.

Annuity

A level stream of cash flows for a fixed period of time.

Which of the following is the simplest form of loan?

A pure discount loan

Consol

A type of perpetuity.

Annuity Due

An annuity for which the cash flows occur at the beginning of the period.

Perpetuity

An annuity in which the cash flows continue forever.

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

Compounding

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

End

Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of the $100 be after one year?

FV= $100 X (1+.10/4)^4= 110.38

If the interest rate is greater than zero, the value of an annuity due is always ___ an ordinary annuity.

Greater than

More frequent compounding leads to:

Higher EARs

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

Ordinary

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

Principal

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

Pure discount loan

Annual Percentage Rate (APR)

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

Stated Interest Rate

The interest rate expressed in terms of the interest payment made each period. (Also known as quoted interest rate)

Effective Annual Rate (EAR)

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