Chapter 5 smartbook

True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.

False The stated interest rate is the interest rate expressed in terms of the interest payment made each period.

More frequent compounding leads to

Higher EARs

True or false: The annuity present value of an amount C is calculated as c*{1−[1/(1+r)^t]/r}

True

The most common way to repay a loan is to pay

a single fixed payment every period

One step in calculating an EAR is to _______ the quoted rate by the number of times that the interest is compounded.

divide

Which of the following could not be evaluated as annuities or annuities due? monthly electric bills tips to a waiter monthly rent payments within a lease installment loan payments

monthly electric bills tips to a waiter

Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the __________ value.

nper

Which of the following are real-world examples of annuities? common stock dividends pensions mortgages leases

pensions mortgages leases

The formula for the ______ value interest factor of an annuity is [1 − 1/(1 + r)^t]/r.

present

Compounding during the year can lead to a difference between the ________________ rate and the effective rate.

quoted

Which of the following are ways to amortize a loan? Pay the principal and interest every period in a fixed payment. Pay only the interest every period and pay the principal off at maturity. Pay both interest and principal in one lump sum at maturity. Pay the interest each period plus some fixed amount of the principal.

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

In the Excel setup of a loan amortization problem, which of the following occurs? The payment is found with = PMT(rate, nper, -pv, fv). To find the dollar interest each month, you multiply the balance times the yearly interest rate. To find the new balance, you subtract the dollar interest from the old balance. To find the principal payment each month, you subtract the dollar interest payment from the fixed payment.

The payment is found with = PMT(rate, nper, -pv, fv). To find the principal payment each month, you subtract the dollar interest payment from the fixed payment.