Chap 6 -- BF

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

-pensions -mortgages

The formula for the present value of annuity due is:

(1 + r) x (PV of an ordinary annuity)

Which of the following is the simplest form of loan?

A pure discount loan

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

Annual

APR:

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

The most common way to repay a loan is to pay _________

a single fixed payment every period which includes both interest and principal

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

A growing annuity has a(n) ______________

finite number of growing cash flows

Most investments involve:

multiple cash flows

With interest-only loans that are NOT perpetuities, the entire principal is:

repaid at some point in the future

Your bank quotes a 9% APR on your car loan (.75 percent interest each month). What is the EAR?

9.38%

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

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

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

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

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

-The amortization period is longer than the loan period -The monthly payments do not fully pay off the loan by the end of the loan period -The borrower makes a large balloon payment at the end of the loan period. -The monthly payment is based on a longer amortization period than the maturity of the loan.

Which of the following are annuities?

-installment loan payments -monthly rent payments in a lease

Which of the following payment methods amortizes a loan?

-Fixed payments that result in a zero loan balance -Interest plus fixed amount

Which of the following are ways to amortize a loan?

-pay the interest each period plus some fixed amount of the principal -pay principal and interest every period in a fixed payment

Interest paid twice a year is known as _____ compounding.

semi-annual

What are two ways to calculate a balloon payment?

-Amortize the loan over the loan life to find the ending balance -Find the present value of the payments remaining after the loan term

Which of the following is true about a growing annuity?

-The cash flows grow for a finite period -The cash flows grow at a constant rate

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

-the amount of interest paid decreases each period -the principal amount paid increases each period

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

-the payment is found using PMT (rate, nper, -pv, fv) -to find the principal payment each month, you subtract the interest payment from the total payment.

The payments in a __________ amortization loan are NOT based on the life of the loan

partial

When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the _______ as a negative value.

payment

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

perpetuity

The formula for the __________ value interest factor of an annuity is {1 - [1/(1 + r)^t]/r}

present

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

principal

The original load amount is called the:

principal

A single cash flow is also known as a:

lump sum

If the stated interest rate is 10 percent, what is the EAR if interest is compounded monthly?

10.47%

Another common term for the effective annual rate (EAR) is the:

APY (annual percentage yield

EAR:

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

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

larger than

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

level

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

tradition; legislation