Finance Part 2

An annuity is considered: a. an ordinary annuity if the payments occur at the beginning of each period. b. an annuity due if the payments occur at the end of each period. c. an ordinary annuity if the payments occur at the end of each period d. an annuity due if the payments occur at the beginning of each period. e. Both (c) and (d)

Both (c) and (d)

By increasing the number of compounding periods in a year, while holding the annual percentage rate constant, you will a. decrease the annual percentage yield. b. increase the annual percentage yield. c. not effect the annual percentage yield. d. increase the dollar return on an investment but will decrease the annual percentage yield.

increase the annual percentage yield.

If you could invest your money at 8% compounded annually, which option should you pick? a. (1), because it has a higher PV. b. You are indifferent between the two choices. c. (2), because it has a higher PV. d. You do not have enough information to make that decision.

(2), because it has a higher PV.

Which is NOT correct regarding an ordinary annuity and annuity due? a. An annuity is a series of equal payments. b. The present value of an ordinary annuity is less than the present value of an annuity due (assuming interest rate is positive). c. As the interest rate increases, the present value of an annuity decreases. d. As the length of the annuity increases, the future value of the annuity decreases.

As the length of the annuity increases, the future value of the annuity decreases.

2. You have the choice between two investments that have the same maturity and the same nominal return. Investment A pays simple interest, investment B pays compounded interest. Which one should you pick? a. A, because it has a higher effective annual return. b. A and B offer the same return, thus they are equally as good. c. B, because it has higher effective annual return. d. Not enough information.

B, because it has higher effective annual return.

Which of the following cannot be calculated? a. Present value of an annuity. b. Future value of an annuity. c. Present value of a perpetuity. d. Future value of a perpetuity.

Future value of a perpetuity.

Which of the following statements is true? a. If compounding at a positive interest rate, the future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity. b. If compounding at a positive interest rate, the future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. c. If compounding at a positive interest rate, the future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. d. If compounding at an interest rate of 0%, the future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. e. None of the above

If compounding at a positive interest rate, the future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.

Which of the following statements is true? a. In an annuity due payments occur at the end of the period. b. In an ordinary annuity payments occur at the end of the period. c. A perpetuity will mature at some point in the future. d. One cannot calculate the present value of a perpetuity.

In an ordinary annuity payments occur at the end of the period.

You are comparing four different investments, as described below: Investment A: Pays 12%, compounded annually Investment B: Pays 12%, compounded quarterly Investment C: Pays 12%, compounded semi-annually Investment D: Pays 12%, compounded continuously Which of the above investments would result in the highest future value? a. Investment A b. Investment B c. Investment C d. Investment D e. All of the investments would have the same future value since the stated interest rate is the same.

Investment D

The Springfield Crusaders just signed their quarterback to a 10 year $50 million contract. Is this contract really worth $50 million? (assume r >0) a. Yes, because the payments over time add up to $50 million. b. No, it is worth more because he can invest the money. c. No, it would only be worth $50 million if it were all paid out today. d. Yes, because his agent told him so.

No, it would only be worth $50 million if it were all paid out today.

Which of the following statements is true? a. It is important to adjust for the differences in the timing of benefits and costs. b. A dollar received today is worth more than a dollar received in the future, assuming a positive interest rate. c. Many fund transfers occur over long periods of time and the time frame needs to be adjusted for. d. All of the above statements are true. e. Only (a) and (b) are true

Only (a) and (b) are true

Which of the following statements are TRUE? Statement I: As you increase the interest rate, the future value of an investment increases. Statement II: As you increase the length of the investment (to receive some lump sum), the present value of the investment increases. Statement III: The present value of an ordinary annuity is larger than the present value of an annuity due. (all else equal) a. Statement I only b. Statements I and II c. Statement II only d. Statements I and III only

Statement I only

Which statement is FALSE concerning the time value of money? a. The greater the compound frequency, the greater the EAR. b. The EAR is always greater than the APR. c. An account that pays simple interest will have a lower FV than an account that pays compound interest. d. The stated interest rate is also referred to as the APR.

The EAR is always greater than the APR.

If the rate of interest that investors can earn on a 2-year investment is zero then a. you will repay the same amount of money at the conclusion of a loan that you borrowed at the beginning of the 2 year loan. b. the "cost" of using money for 2 years is zero. c. you will receive the same amount of money at maturity that you invested at the beginning of a 2 year investment. d. all of the above.

all of the above.

An annuity can best be described as a. a set of payments to be received during a period of time. b. a stream of payments to be received at a common interval over the life of the payments. c. an even stream of payments to be received at a common interval over the life of the payments. d. the present value of a set of payments to be received during a future period of time.

an even stream of payments to be received at a common interval over the life of the payments.

Discounting is: a. calculating the future value of present cash flows. b. calculating the present value of future cash flows. c. is necessary in order to pull present values to the future. d. none of the above

calculating the present value of future cash flows.

The ratio of interest to principal repayment on an amortizing loan a. increases as the loan gets older. b. decreases as the loan gets older. c. remains constant over the life of the loan. d. changes according to the level of market interest rates during the life of the loan.

decreases as the loan gets older.

For a positive r, a. future value will always exceed present value. b. future and present will always be the same. c. present value will always exceed future value. d. None of the above is true.

future value will always exceed present value.

You are trying to accumulate $2,000 at the end of 5 years by contributing a fixed amount at the end of each year. You initially decide to contribute $300 per year but find that you are coming up short of the $2,000 goal. What could you do to increase the value of the investment at the end of year 5? a. invest in an investment that has a lower rate of return. b. invest in an investment that has a higher rate of return. c. make a sixth year contribution. d. contribute a smaller amount each year.

invest in an investment that has a higher rate of return.

You are asked to choose between a 4-year investment that pays 10% compound interest and a similar investment that pays 11.5% simple interest. Which investment will you choose? a. the 10% compound interest investment b. the 11.5% simple interest investment c. you are indifferent between the investment choices d. there is not enough information to answer the question

the 10% compound interest investment

If you hold the annual percentage rate constant while increasing the number of compounding periods per year, then a. the effective interest rate will increase. b. the effective interest rate will decrease. c. the effective interest rate will not change. d. none of the above.

the effective interest rate will increase.

In the equation below, the number "100" represents $75.13 = $100 / (1 + .1)3 a. the present value a cash flow to be received at a later date. b. the future value a cash flow to be received at a later date. c. the discount rate for the future cash flow. d. the number of periods before the cash flow is to be received.

the future value a cash flow to be received at a later date.

Which of the following should have the greatest value if the discount rate applying to the cash flows is a positive value? a. the present value of a $5 payment of to be received one year from today. b. the future value of a $5 payment received today but invested for one year. c. the present value of a stream of $5 payments to be received at the end of the next two years. d. the future value of a stream of $5 payments to be received at the end of the next two years.

the future value of a stream of $5 payments to be received at the end of the next two years.

In the equation below, the exponent "3" represents $133.10 = $100 × (1 + .1)3 a. the future value of an investment. b. the present value of an investment. c. the annual rate of interest paid. d. the number of periods that the present value is left on deposit.

the number of periods that the present value is left on deposit.

The amount that someone is willing to pay today, for a single cash flow in the future is a. the future value of the cash flow. b. the future value of the stream of cash flows. c. the present value of the cash flow. d. the present value of the annuity of cash flows

the present value of the cash flow.

If you were evaluating a investment over a 10-year period that paid 8% compounded semiannually: a. you would not need to make any special adjustments because the semiannual compounding will not impact the investment's future value. b. you would need to divide the number of years by two and multiply the interest rate by two to properly adjust for the semiannual compounding. c. you would need to divide the interest rate by two and multiply the number of years by two to properly adjust for the semiannual compounding. d. None of the above

you would need to divide the interest rate by two and multiply the number of years by two to properly adjust for the semiannual compounding.