Finance 450-test 2
To find the present value of an annuity of $100 per year for 10 years at 10% per year using the tables, find a present value factor of 6.1446 and multiply it by ______.
$100
When calculating annuity present values using a financial calculator, the _____________ amount is left blank.
FV
For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)
-1 divided by -the reciprocal of
Which of the following methods are used to calculate present value?
-A time value of money table -An algebraic formula -A financial calculator
Which of the following processes can be used to calculate the future value of multiple cash flows?
-Calculate the future value of each cash flow first and then sum them -Compound the accumulated balance forward one year at a time
Which of the following are the primary as well as easy ways used to perform financial calculations today?
-Spreadsheet functions -Financial calculator
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?
EFFECT(0.12,4)
Using the PV, discount rate, and --------, you can determine the number of periods.
FV
True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.
False
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
compounding
The idea behind ______ is that interest is earned on interest.
compounding
To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?
Because the $100 is an outflow from you which should be negative.
The basic present value equation is:
PV = FVt/(1 + r)t
The annuity present value factor equals one __________ the present value factor all divided by the discount rate.
minus
Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the ________ value.
nper
The _________________ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
payment
C/r is the formula for the present value of a(n) ____.
perpetuity
EAR = (1 + __________rate/m)m - 1
quoted
In the Excel setup of a loan amortization problem, which of the following occurs?
- To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. - The payment is found with = PMT(rate, nper, -pv, fv).
Time value of money tables are not as common as they once were because:
- it is easier to use inexpensive financial calculators instead - they are available for only a relatively small number of interest rates.
When entering variables in a spreadsheet function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?
-future values -present values -payment
If you invest at a rate of r for ----------- periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
two
Which of the following is the simplest form of loan?
A pure discount loan
If FV= PV x (1+r) is the single period formula for future value, which of the following is the single period present value formula?
PV = FV/(1+r)
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
True
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
True
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
True
True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
True
True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.
True
The interest rate charged per period multiplied by the number of periods per year is equal to _____________ _____________ ___________ on a loan.
annual percentage rate
The process of accumulating interest in an investment over time to earn more interest is called _________.
compounding
Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.
discounted cash flow (DCF)
True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.
false
True or false: The interest rate charged per period divided by the number of periods per year.
false
When finding the present or future value of an annuity using a spreadsheet, the ______ ______ should be entered as a decimal.
interest rate
When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.
longer
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
Which of the following are ways to amortize a loan?
- Pay the interest each period plus some fixed amount of the principal. - Pay principal and interest every period in a fixed payment.
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21
Which formula below represents a present value factor?
1/(1+r)t
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?
=PV(0.10,10,-100,0,0)
Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?
=PV(0.10,5,0,-300)
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV×(1 + r)t
True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.
False
True or false: If you invest for two periods at an interest rate of r, then your money will grow th (1 + r) per dollar invested.
False
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
False
True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.
False
True or false: To find the annuity future value factor, you only need the cash flows and the discount rate.
False
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
False
Which of the following is not a way to amortize a loan?
Fixed interest payments only
What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?
The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.
The interest rate charged per period multiplied by the number of periods per year is equal to ___________ ___________ _____________ on a loan
annual percentage rate
An annuity with payments beginning immediately rather than at the end of the period is called an _________.
annuity due
Future value is the ________ value of an investment at some time in the future.
cash
One step in calculating an EAR is to _________________ the quoted rate by the number of times that the interest is compounded.
divide
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
effective
The _____________ annual rate is the interest rate expressed as if it were compounded once per year.
effective
True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.
false
True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).
false
The amount an investment is worth after one or more periods is called the _____ value.
future
The present value is the current value of the ___________ cash flows discounted at the appropriate discount rate.
future
More frequent compounding leads to:
higher EARs
The present value of a lump-sum future amount:
increases as the interest rate decreases.
A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with _________ -term business loans
medium
The entire principal of an interest-only loan is the:
original loan amount
With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.
present; future
The original amount of a loan is termed the loan ___________.
principal
If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a _______________ .
pure discount loan
Compounding during the year can lead to a difference between the ______________ rate and the effective rate.
quoted
With typical interest-only loans, the entire principal is:
repaid at some point in the future
With ____________ interest, the interest is not reinvested.
simple
The general formula for ______ is (1+quoted rate/m)m - 1.
the EAR
The real world has moved away from using _____________________________ for calculating future and present values.
time value of money tables
True or false: Interest rates can be quoted in various ways.
true
South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:
will be greater if you invest with Northern Bank.
