chapter 6 review in book

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

what 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

what should be valued when using a perpetuity formula?

-cash flows from a product whose sales are expected to remain constant forever -preferred stock -a consol

what payment methods amortizes a loan?

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

Ways to amortize a loan

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

another common term for the effective annual rate is the

APY

example of a perpetuity?

a constant stream of cash flows forever

what is the simplest form of a loan?

a pure discount loan

an annuity date is a series of payments that are made ___

at the beginning of each period

when calculating the present value of multiple cash flows using a spreadsheet, you must

calculate the present value of each cash flow then add the discounted values together

the EAR takes into account the __ of interest that occurs within a year.

compoundign

one example of perpetuity is a British

consol

Given the same APR, more frequent compounding results in _____.

higher EARs

a perpetuity is a constant stream of cash flows for a ___ period of time

infinite

the most common way to repay a loan is to pay

interest plus fixed prinicipal amount every period

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

larger than

the present value formula for a(n) ____ is PV = C/r, where C is the constant and regularly times cash flow to infinity, and r is the interest rate.

perpetuity

amortization is the process of paying off loans by regularly reducing the

principal

the original loan amount is called the

principal

because of ___ and ___, interest rates are often quoted in many differnt ways

tradition; legislation

another common name for the effective annual rate is the annual percentage

yield

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

end

how frequently does continuous compounding occur?

every instant

Cash flows grow at an irregular rate in growing annuity. T/F

false

In a partial amortization loan, the amortization period is shorter than the loan period. T/F

false

T/F In the amortization of a fixed payment loan, the amount of interest and principal paid increases each period

false

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

partial

what type of amortization is most commonly used in the real world for mortgages and car loans?

fixed payment

a single cash flow is also known as a

lump sum

what are some examples of real-world annuities?

mortgages and pensions

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

ordinary

with interest-only loans that are not perpetuities, the entire principal is:

repaid at some point in the future

interest paid twice a year is known as ___ compounding

semi-annual

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

greater than

APR definiton

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

EAR definition

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

In a partial amortization loan, the monthly payments do not fully pay off the loan by the end of the loan period. TF

true

T/F In the amortization of a fixed payment loan, the payment amount decreases each period.

false

cash flows grow for an infinite period in growing annuity. T/F

false

the future value of $100 at 10 percent compounded semiannualy is ____ the future value of $100 at 10 percent compounded annually

greater than

the loan balance on partial amortization loans declines so slowly because the

payments are mostly interest

In a partial amortization loan, the amoritzation period is longer than the loan period. T/F

true

T/F In the amortization of a fixed payment loan, the principal amount paid increases each period

true

consol

bond that pays interest only and does not mature

when using the spreadsheet (Excel) function for finding the PV of an annuity, its a good idea to enter the ___ as a negative value

payment

In a partial amortization loan, the borrower makes a large balloon payment at the end of the loan period. T/F

true

in the Excel setup of a loan amortization problem, what occurs>

-payment is found using PMT(rate, nper, -pv, fv) -to find pricipal, subtract interest payment from total payment

which compounding interval will result in the lowest future value assuming everythign else is held constant?

annual

a lump sum payment to pay off the balance of a partially amortized loan is called a __ payment

balloon or bullet

payday loans allow you to

borrow now and repay later

compared to a comparable fixed payment loan, the total interest on a fixed principal loan is

less

In a partial amortization loan, the monthly payment is based on a longer amortization period than the maturity of the loan. T/F

true

T/F In the amortization of a fixed payment loan, the amount of interest paid decreases each period

true

cash flows grow at a constant rate in growing annuity. T/F

true

cash flows grow for a finite period in growing annuity. T/F

true