Chapter 5 notes
medium
A simple way to amortize a loan is the have the borrower pay the interest each period plus some fixed amount. This approach is common with ---- - term business loans
principal
Amortization is the process of paying off loans by regularly reducing the ----
at the beginning of each period
An annuity due is a series of payments that are made ---
annuity due
An annuity with payments beginning immediately rather than at the end of the period is called an ---
true
An ordinary annuity consist of a level stream of cash flows for a fixed period of time
effective
Assume interest is compounded monthly. The --- annual rate will express this rate as though it were compounded annually.
tradition; legislation
Because of --- and ---, interest rates are often quoted in many different ways
quoted
Compounding during the year can lead to a difference between the --- rate and the effective rate
stated
Compounding during the year can lead to a difference between the --- rate and the effective rate
greater than
If the interest rate is greater than zero, the value of an annuity due is always and ordinary annuity
higher EARs
More frequent compounding leads to
divide
One step in calculating an EAR is to --- the quoted rate by the number of times that the interest is compounded
payment
The ---- for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate
false
The annuity present factor equals one minus the discount rate all divided by the present value factor
minus
The annuity present value factor equals one --- the present
0
The cash flows of an annuity due are the same as those of an ordinary annuity except there is an extra cash flow at Time ---
compounding
The effective annual rate (EAR) takes into account the --- of interest that occurs within a year
compounding
The effective annual rate (EAR) takes into account the --- of interest that occurs withing a year
uneven
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
(1+r) * (PV of an ordinary annuity)
The formula for the present value of an annuity due is:
EAR
The general formula for --- is (1+quoted rate/m)^m-1
APR
The interest rare charged per period multiplied by the number of periods per year is equal to --- on a loan.
a single fixed payment every period
The most common way to repay a loan is to pay ---
principal
The original amount of a loan is termed the loan ---
true
To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them
true
True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.
nper
Using an excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the --- value
FV
When calculating annuity present values using a financial calculator, the ---- amount is left blank
true
When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.
interest rate
When finding the present value or future value of an annuity using a financial calculator, the ---- should be entered as a percentage
fixed interest payments only
Which of the following is NOT a way to amortize a loan
a constant stream of cash flows forever
Which of the following is a perpetuity?
EFFECT(0.12,4)
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12 percent compounded quarterly to an EAR?
a pure discount loan
Which of the following is the simplest form of loan?
Calculate the future value of each cash flow first and then sum them Compound the accumulated balance forward one year at a time
Which of the following processes can be used to calculate the future value of multiple cash flows?
=PV(0.10,10,-100.00)
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per years?
level
An ordinary annuity consists of a --- stream of cash flows for a fixed period of time
end
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ----- of each period
The payment is found with = PMT(rate, nper, -pv,fv) To find the principle payment each month, you subtract the dollar interest payment from the fixed payment
In the excel setup of a loan amortization problem, which of the following occurs?
perpetuity
The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
ordinary
The present value of an annuity due is equal to the present value of an annuity multiplied by (1+r)
false
To find the annuity future value actor, you only need the cash flows and the discount rate
N
You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the ---- value on the financial calculator
