Fin 310 Chapter 5

Which of the following statements is FALSE? A. An easy way to compute the value of an annuity due (such as a lease) is to compute the value of a regular annuity, and then compound the result forward one period. B. The annual percentage rate (APR) is the best way to compare two investments with different compounding periods. C. Lenders and investors prefer daily compounding to annual compounding. D. The process of paying off a loan by making regular principal reductions is called amortizing.

B. The best way to compare two investments is using effective annual rate (ear)

Which of the following statements is FALSE? A. The APR should not be used to compare two investments with different compounding periods. B. Lenders prefer less frequent compounding. C. Treasury Bills are pure discount loans with no coupon payments. D. Typical bullet bonds are interest-only loans where the principal is not amortized.

B. they prefer more frequent componding

Lisa has $1,000 in cash today. Which one of the following investment options will come closest to doubling her money? A. 12 percent interest for 5 years B. 7 percent interest for 9 years C. 8 percent interest for 9 years D. 6 percent interest for 10 years

C. Use the the calc FV must be negative, plug in each interest rate and then hit alpha enter. every single number besides 8 percent goes over the amount of years.

Which of the following statements is FALSE? A. With simple interest, the interest is not reinvested, so interest is earned each period only on the original principal. B. Both lenders and investors prefer more compounding. C. Amortizing a loan allows for a portion of principal to be paid with the interest each period principal so that the actual payments to interest will increase with each payment. D. Treasury Bills are pure discount loans sold by the US government that repay a fixed amount as one lump sum at some time in the future.

C. Each payment covers interest plus reduces principal

Fill in the blanks: An annuity is worth _______ than a perpetuity, and a constant annuity is worth _______ than a growing annuity. (assuming the normal circumstance where the discount rate exceeds the growth rate and where the growth is positive) A. more, more B. more, less C. less, more D. less, less

D.

Which of the following statements is TRUE? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always strictly greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. D. The EAR is the best measure of the actual rate you are paying on a loan.

D. Why? A. The apr and Ear do not equal B. the EAR Is not always greater than the APR C. Not sure what it is trying to say.... but APR's formula = m[(1+EAR)^1/m-1]

Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semi-annually C. 6 percent compounded quarterly D. 6 percent compounded monthly

D. 6* 12 months = 36% Why? A. 6*1=6 B. 6*2= 12 C. 6*4= 24

Which of the following choices is NOT a CORRECT way to complete this sentence: Other things equal, a set of cash flows is more valuable ... A. The longer they last B. The more frequently they are paid C. The faster they grow D. The larger the time value that investors require compensation for trading a dollar today for dollars tomorrow

D. A dollar to day is worth more than a dollar tomorrow

Which of the following statements is FALSE? A. The future value of a single cash flow grows across a longer time period B. The present value of a single cash flow falls with a higher interest rate C. The present value of an annuity grows if the annuity lasts longer D. The future value of an annuity falls with a higher interest rate

D. The present value of an annuity falls with higher interest rate.

Annuity=

PMT/R [1-1/(1+R)^t]

Growing Annuity

PV= (PMT/ M)/ (r/m)-(g/m) *[1-((1+g/m)/(1+r/m))^m*t]

Perpetuity =

PV=PMT/r