FIN 337 Ch 6

At the end of 5 days, you repay your $1,000 loan plus $50 in interest. What is the EAR?

(($1,050 / $1,000)^(365/5) - 1) = 34.2224 OR 3,422.24%

using a financial calculator, find the FV of an annuity of $400 per year for 10 years at 5%

FV = $5,031.16 PMT = -400 N = 10 I/YR = 5%

Which of the following processes can be used to calculate future value for multiple cash flows?

- Compound the accumulated balance forward one year at a time - Calculate the future value of each cash flow first and then add them up

You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2-week period. What is your stated annual interest rate?

.10*365/14 = 2.0671

you need 5000 in one year, 4300 in two years, 5000 in three years. discount rate of 17%.

5000/1.17 4300/1.17^2 5000/1.17^3

assume 12% annual interest is compounded semiannually on a $500 investment. What will the investment be worth after 1 year?

FV = $561.80 PV = -500 N = 2 I/YR = 6%

suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10 percent annual interest. How much is the interest payment in the second year of the loan?

Interest is computed on the principal outstanding for the year, which is ($1,200 - 400) = $800 * .1 = $80

you have decided to fund an account that will pay your descendants the inflation-adjusted equivalent of $100 per year forever. You assume inflation will equal 3% per year, and you expect the account to earn 7% per year. How much do you need to put in the account today to ensure your gift will continue forever?

PV = C/(r-g) = 100/(.07-.03) = $2,500

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

calculate the future value of each cash flow then add the compounded values together

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

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

end

a growing annuity has a(n)____ number of _____

finite number of growing cash flows

a traditional (non-growing) annuity consists of a(n) ____ stream of cash flows for a fixed period of time

level

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

ordinary

what is the most common way to repay a loan?

paying a single fixed payment each period plus interest

what is the simplest form of loan?

pure discount loan

APR

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

EAR

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

Because of ___ and ___, interest rates are often quoted in many different ways

tradition; legislation

you agree to pay back $1,100 in 4 weeks for a $1,000 payday loan. Your annual percentage rate (APR) rounded to two decimal places is ____%. (assume weekly compounding and assume that there are 52 weeks in a year)

[(1100/1000) - 1]*52/4 = 130%

The effective annual rate (EAR) takes into account the ____ of interest that occurs within a year

compounding