Finance Exam 2

The primary difference between simple and compound interest is that

compound interest entails receiving interest payments on previously earned interest

The process of accumulating interest on an investment over time to earn more interest is called a. growth b. compounding c. aggregation d. accumulation e. discounting

compounding

True or False? Consider the TVM equation: The greater the interest rate, other things remaining equal, the greater the present value

false

True or false? Given a positive interest rate and a positive cash flow, an ordinary annuity always has a greater future value than an annuity due of the same size and number of cash flows

false

Which of the below is NOT a major component of interest rates? a. real rate b. inflation premium c. historical interest rates d. default premium

historical interest rates

Which of the following is NOT an example of an ordinary annuity cash flow?

mortgage payments due at the beginning of the period

to determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the _____ to get the appropriate periodic interest rate

number of compounding periods per year

A series of equal periodic cash flows that occur at the end of a period is known as a/an ______ a. ordinary annuity b. annuity due c. amortization d. perpetuity e. none of the above

ordinary annuity

a never-ending stream of equal periodic, end-of-the-period cash flows is called a/an _____ a. annuity due b. annuity c. ordinary annuity d. amortization e. perpetuity

perpetuity

The main variables of the TVM equation are

present value, future value, time, interest rate, and payment

most people prefer to receive money today rather than ten years from now because

receiving cash today enables one to take advantage of current investment opportunities

Yield curves:

show the relationship between interest rates and time to maturity

interest earned only on the original principal amount invested is called ____ interest a. free b. annual c. compound d. interest on e. simple

simple

In comparing an ordinary annuity and an annuity due, which of the following is true

the future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity

an asset's value may be estimated by calculating

the present value of all cash flows expected from the asset

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true

The future value would be greater if the interest rate was higher

a/an _____ is a series of equal beginning-of-period cash flows

annuity due

which of the following actions will DECREASE the present value of an investment a. increase the interest rate b. increase the future value c. decrease the amount of time d. all of the above will increase the present value

increase the interest rate

The future value of a dollar ____ as the interest rate increases and ______ as the time to maturity increases

increases; increases

The phrase "price to rent money" is sometimes used to refer to ____ a. historical prices b. compound rates c. discount rates d. interest rates

interest rates

the question "how much will I have in my account at a specific point in the future, given a specific interest rate?" is best answered by which form of the TVM equation

FV=PV(1+r)^n

True or False? Consider the TVM equation: an increase in the present value will decrease the future value, other things remaining equal

False

The present value of a dollar ____ as the interest rate increases and ____ as the time to maturity increases

decreases; decreases

The _____ compensates the investor for the additional risk that the loan will not be repaid in full a. default premium b. inflation premium c. real rate d. interest rate

default premium

Present value calculations do which of the following?

discount all future cash flows back to the present

The interest rate expressed as if it were compounded once per year is called the ____ rate a. stated rate b. compound interest c. effective annual d. daily interest

effective annual

an inverted (downward-sloping) yield curve

exists when short-term rates exceed long-term rates

True or False? Consider a two-year investment: given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding)

true