Finance 2000 Learnsmart Ch.5
How much is $100 at the end of each year forever at 10% interest worth today?
$1,000
Your insurance agent wants to sell you an annuity consisting of 20 equal end of year payments of $10,000 each, starting at the end of this year. Your desired rate of return for investments of this type is 7%. What is the most you would pay for this annuity today?
$105,940.14 PV= 10000[1/.07-1/.07(1.07)^20] = 105,940.14
The effective annual interest rate is equal to
(1+APR/m)^m-1
Which of the following statements are true regarding the present value of a stream of cash payments?
- Nominal cash payments should be discounted using a nominal interest rate - Real cash payments should be discounted using a real interest rate
Which of the following statements are true regarding the present value of a stream of cash payments?
- Real cash payments should be discounted using a real interest rate - Nominal cash payments should be discounted using a nominal interest rate
Which of the following are annuities?
- Yearly lease payments - Annual installment loan payments
If a bank quotes a loan with an APR of 15%, compounded monthly, what is the periodic rate on this loan?
15/12=1.25
$200 at the end of each year forever at 10% per year is worth how much today?
200/.10 = $2,000
If a bank account pays a monthly interest rate on deposits of 0.5%, what is the APR the bank will quote for this account?
6% (12x5=6)
The best known price index used by economists who measure inflation is _____.
CPI - the consumer price index
_____ dollars refer to that actual number of dollars of the day, whereas ______ dollars the amount of purchasing power.
Current/constant Nominal/real
Another name for the interest rate used to calculate PV is the ____ rate.
Discount
A traditional (non-growing) annuity consists of a _____ stream of cash flows over a period of time
Fixed
If the interest rates increase, what will happen to PV overtime?
PV will decline
C/r is the formula for the present value of a ____.
Perpetuity
In excel, cash inflows are recognized as ______ values and cash outflows are recognized as ____ values. Interest rates should be entered as _____.
Positive Negative Decimals
Which of the following is a proper definition for the effective annual interest rate?
The interest rate that is annualized using compound interest
The discount factor refers to the present value of a $1 future payment
True
The nominal interest rate can be defined as an interest rate quoted today by a financial institution on a loan or investment, such as an APR or period rate.
True
Perpetuity
a constant stream of cash flows forever
The effective annual interest rate is also known as the ____.
annually compounded rate
The present value of an annuity of $1 per period is called the
annuity factor
An ordinary annuity is a series of level payments that begin..
at the end of one payment period
At a rate of interest of 10%, the present value or $100 will _____ as the time period _____.
decreases;increases
An annuity due is a series of level payments that begin
immediately
If interest rates go down, the present value of a perpetuity will _____.
increase
The equation used to determine the approximate real interest rate is
real interest rate = nominal interest rate - inflation rate
The annual percentage rate (APR) on a loan or investment is properly defined as
the interest rate per period multiplied by the number of compounding periods per year
