FIN 301 Chapter 5 HW/Test Questions

Which one of the following has the highest effective annual rate? 6 percent compounded annually 6 percent compounded semi-annually 6 percent compounded quarterly 6 percent compounded monthly All the above answers have the same effective annual rate.

6 percent compounded monthly

Which one of the following statements is true concerning annuities? All else equal, an ordinary annuity is more valuable than an annuity due. All else equal, a decrease in the number of payments increases the future value of an annuity due. An annuity with payments at the beginning of each period is called an ordinary annuity. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for 5 years. Assuming that all payments are paid timely, his last payment will pay off the loan in full. What type of loan does Bill have? Amortized Complex Pure discount Lump sum Interest-only

Amortized

Which one of the following statements concerning annuities is correct? The present value of an annuity is equal to the cash flow amount divided by the discount rate. An annuity due has payments that occur at the beginning of each time period. The future value of an annuity decreases as the interest rate increases. If unspecified, you should assume an annuity is an annuity due. An annuity is an unending stream of equal payments occurring at equal intervals of time.

An annuity due has payments that occur at the beginning of each time period.

Which one of the following will decrease the present value of an annuity? Increase in the annuity's future value Increase in the payment amount Increase in the time period Decrease in the discount rate Decrease in the annuity payment

Decrease in the annuity payment

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of 3 years. What type of loan did you obtain? Interest-only Amortized Perpetual Pure discount Lump sum

Interest-only

Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment which she will be required to pay 2 years from today. Which type of loan is this? Principal-only Amortized Interest-only Compound Pure discount

Pure discount

Which one of the following is an example of a perpetuity? Retirement pay of $2,200 a month for 20 years Lottery winnings of $1,000 a month for life Car payment of $260 a month for 60 months Trust income of $1,200 a year forever Apartment rent payment of $800 a month for one year

Trust income of $1,200 a year forever

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: will be less than 12.9 percent. can either be less than or equal to 12.9 percent. is 12.9 percent. can either be greater than or equal to 12.9 percent. will be greater than 12.9 percent.

will be greater than 12.9 percent.