FIN CH 4
Which one of the following statements concerning interest rates is correct?
An effective annual rate is the rate that applies if interest were charged annually.
Lew's Tours is just about to pay an annual dividend of $1.20 a share. The dividend is expected to increase by 2 percent annually and the applicable discount rate is 13 percent. Which one of these is the correct formula for computing the current value of this stock?
$1.20 + ($1.20 × 1.02)/(.13 - .02)
Jennings Lumber just paid an annual dividend of $1.20 a share. The dividend is expected to increase by 2 percent annually and the applicable discount rate is 13 percent. Which one of these is the correct formula for computing the current value of this stock?
($1.20 × 1.02)/(.13 - .02)
Which one of these statements related to the time value of money is correct? Assume a positive rate of interest.
A dollar received today is more valuable than a dollar received next month.
By federal law, lenders must disclose which one of these?
APR, including fees and other noninterest charges
Which type(s) of loan can be repaid with annuity payments?
Amortized loan
The stated rate of interest is 8 percent. Which form of compounding will produce the highest effective rate of interest?
Continuous
Assume you start saving for retirement today. Which one of these is most apt to decrease the amount you have saved by the day you retire?
Delaying any additions to your savings by one year
The interest rate charged per period multiplied by the number of periods per year is called the:
annual percentage rate.
Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?
Growing annuity
Which one of the following would have the greatest value assuming each has Year 1 annual cash flows of $100 and a discount rate of 8 percent, compounded annually?
Growing perpetuity
Which of these are basic assumptions of the growing perpetuity present value formula?
II. The time periods are regular and discrete. III. g < r
You are comparing two investments, A and B, with unequal annual cash flows and varying numbers of years. Which one of these statements is correct regarding this comparison?
If B a has higher present value, then B will have the higher future value at any point in time, given a stated discount rate.
Which of the following will increase the effective annual rate (EAR) of a loan?
Increasing either the annual percentage rate (APR) or the compounding frequency
Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm?
Increasing the annual growth rate of the cash flows
Which one of the following will increase the future value of a finite stream of uneven cash flows? Assume a positive rate of return.
Increasing the first cash flow by $100 and lowering the last cash flow by $100
Which type(s) of loan repays the interest as an annuity and the principal as a lump sum?
Interest-only loans
Which term is defined as the present value of all future cash flows minus the initial cost?
Net present value
You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?
Option A is the better choice of the two given any positive rate of return.
In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?
Pure discount loans
Which one of the following statements concerning the annual percentage rate is correct?
The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.
Which one of these statements concerning two annuities is correct? Assume both annuities have $1,000 annual cash flows for four years.
The annuity due is more valuable than the ordinary annuity.
An annuity:
is a stream of equal payments that occur in equal periods of time for a finite period.
Discounting cash flows involves:
adjusting all expected future cash flows to their current value.
The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as:
e^.09 - 1.
The interest rate expressed as if it were compounded once per year is called the:
effective annual rate
Given a positive rate of return and multiple time periods, compound interest:
increases in an exponential manner.
Annuities with payments occurring at the end of each time period are called _____, whereas annuities with payments occurring at the beginning of each time period are called _____.
ordinary annuities; annuities due
An annuity stream where the payments occur forever is called a(n):
perpetuity
A perpetuity differs from an annuity because:
perpetuity payments never cease.
A growing annuity is a set of:
steadily increasing cash flows occurring each time period for a fixed number of periods.
The discount rate assigned to a proposed project is the rate:
the firm must expect to earn before committing funding for the project.
The value of a firm is best defined as the:
total present value of all of the firm's future cash flows.
