Managerial Ch.6

The APR is also called the ______ rate and it differs from the EAR. a. inflated b. stated c. reversed d. average

b. stated

_______ is the process of paying off loans by regularly reducing the principal.

Amortization

Which of the following is the formula for the EAR?

[1 + (Quoted rate/m)]^m − 1

A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time. a. random b. level c. infinite d. uneven

b. level

The effective annual rate (EAR) takes into account the _____ of interest that occurs within a year.

compounding

Which of the following is a perpetuity? a. A growing stream of cash flows for a fixed period b. A constant stream of cash flows for a fixed period c. An undulating stream of cash flows forever d. A constant stream of cash flows forever

d. A constant stream of cash flows forever

______ loans are short-term loans made to consumers which require you to write a check today that is postdated. a. Mortgage b. reverse c. spiked d. payday

d. payday

An annuity ______ is an annuity for which the cash flows occur at the beginning of each period.

due

Versus a similar fixed payment loan, the total interest on a fixed _______ loan is less.

principal

Which of the following are true about a partial amortization loan? a. The monthly payments do not fully pay off the loan by the end of the loan period b. The amortization period is longer than the loan period c. The monthly payment is based on a longer amortization period than the maturity of the loan d. The amortization period is shorter than the loan period e. The borrower makes a large balloon payment at the end of the loan period

a, b, c, e

What is formula to calculate the present value of an annuity that makes payments of $100 per year for 10 years if the first payment is made immediately and the discount rate is 10 percent per year?

$100[(1 − 1/1.1010)/0.10][1.10]

Given the same APR, more frequent compounding results in _____. a. higher EARs b. lower EARs c. rounder EARs

a. higher EARs

A single cash flow is also known as a: a. lump sum b. multiple cash flow c. level cash flow d. terminal cash flow

a. lump sum

The ____ rate is used to find the EAR. a. inverted interest b. discount yield c. inflation d. quoted

d. quoted

If the interest rate is greater than zero, the value of an annuity due is always _____ an ordinary annuity. a. less than b. greater than c. equal to

b. greater than

Given the same APR, more frequent compounding results in _____. a. rounder EARs b. higher EARs c. lower EARs

b. higher EARs

The most common way to repay a loan is to pay: a. A fixed amount of interest and a fixed amount of principal each period b. Just interest every period c. Interest plus a fixed principal amount every period d. A lump sum of interest and principal at the end of a loan.

c. Interest plus a fixed principal amount every period

The formula for the present value of an annuity due is _____.

(1+r) * (PV of an ordinary annuity)

The payments in a ______ amortization loan are NOT based on the life of the loan. a. partial b. remunerative c. federal d. full

a. partial

The loan balance on partial amortization loans declines so slowly because the ___. a. interest rate rises over the years b. payments are mostly interest c. payments are mostly principal d. yearly payment rises steadily over the years

b. payments are mostly interest

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period. a. end b. beginning c. middle

a. end

When using the spreadsheet function for finding the PV of an annuity, it's a good idea to enter the _____ as a negative value. a. interest rate b. payment c. number of periods d. type of annuity

b. payment

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate. a. growing annuity b. perpetuity c. growing perpetuity d. annuity

b. perpetuity

Which of the following are ways to amortize a loan? a. Pay only interest every period and pay the principal off at maturity b. Pay principal and interest every period in a fixed payment c. Pay both interest and principal in one lump sum at maturity d. Pay the interest each period plus some fixed amount of the principal.

b and d b. Pay principal and interest every period in a fixed payment. d. pay the interest each period plus some fixed amount of the principal

Which compounding interval will result in the lowest future value assuming everything else is held constant? a. Constant b. Annual c. Daily d. Continuous

b. Annual

How frequently does continuous compounding occur? a. 1000 times a year b. Every instant c. 1,000,000 times a year d. 100 times a year

b. Every instant

______ loans are short-term loans made to consumers which require you to write a check today that is postdated. a. Mortgage b. Payday c. Spiked d. Reverse

b. Payday

A growing annuity has a(n) _______ a. infinite number of growing cash flows b. finite number of level cash flows c. finite number of growing cash flows d. infinite number of constant cash flows

b. finite number of level cash flows

Which type of amortization is most commonly used in the real world for mortgages and car loans? a. fixed interest b. fixed payment c. variable period d. fixed principal

b. fixed payment

With interest-only loans that are not perpetuities, the entire principal is: a. never repaid b. repaid at some point in the future c. repaid before any interest payments are made

b. repaid at some point in the future

An effective annual rate of 7.12 percent is equal to 7 percent compounded _____. a. continuously b. semiannually c. quarterly d. daily

b. semiannually For semiannual compounding, EAR = (1 + 0.07/2)2 - 1 = 7.12%

Because of ______ and _______, interest rates are often quoted in many different ways. a. religion; randomness b. tradition; legislation c. mathematics; evolution

b. tradition; legislation

Which of the following are true about the amortization of a fixed payment loan? a. The amount of interest and principal paid increases each period. b. The amount of interest paid decreases each period. c. The payment amount decreases each period d. The principal amount paid increases each period

c and d The payment amount decreases each period and the principal amount paid increases each period.

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. a. three years b. half a year c. one year d. two years

c. one year

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then ____. a. forgiven by the lender b. amortized over the remaining loan period c. amortized just like the first part d. Paid off in a lump sum bullet payment

d. Paid off in a lump sum bullet payment

Amortization is the process of paying off loans by regularly reducing the _________. a. interest rate b. payment frequency c. life of the loan d. principal

d. principal

The present value of a series of _____ cash flows is the amount you would need today to exactly duplicate those future cash flows.

future

The future value of $100 at 10 percent compounded semiannually is ______ the future value of $100 at 10 percent compounded annually.

greater than; The future value of $100 at 10 percent compounded semiannually is greater than the future value of $100 at 10 percent compounded annually because in the second period interest is earned on the interest for the first period.

For a positive stated annual interest and multiple compounding periods per year, the EAR is always ______ than the APR.

larger

The present value of an annuity due is equal to the present value of a ______ annuity multiplied by (1+r)

ordinary

The future value factor for a(n) ______ is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.

annuity

When calculating the future value of multiple cash flows using a spreadsheet, you must: a. Use the time value of money tables to calculate the future value of each cash flow b. Calculate the present value of each cash flow and hen add the discounted values together. c. Calculate the future value of each cash flow then add the compounded values together

c. Calculate the future value of each cash flow then add the compounded values together

APR and EAR

APR: The interest rate per period multiplied by the number of periods in the year EAR: The interest rate stated as though it were compounded once per year

A typical investment has a large cash _____ at the beginning and then a cash _____ for a many years.

Outflow; inflow

A lump sum payment to pay off the balance of a partially amortized loan is called a _____ payment

Balloon or bullet

Which of the following payment methods amortizes a loan? a. Fixed payments that result in a zero loan balance b. single lump sum payment c. fixed interest payments only d. interest plus fixed amount

a and d Fixed payments that result in a zero loan balance AND interest plus fixed amount amortizes loans

Ralph has $1000 in an account that pays 10% per year. Ralph wants to give his money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year? a. $405.63 b. $412.98 c. $402.11 d. $397.66

c. $402.11 Calculate the payment using the PV of an annuity at 10 percent for 3 years. $1,000/[(1 − 1/1.103)/0.10] = $402.11.

Payday loans allow you to _____ a. pay back the loans only on paydays b. pay back part of the loan every payday c. borrow now and repay later d. borrow on paydays only

c. borrow now and repay later

Which of the following is true about a growing annuity? a. The cash flows grow for an infinite period b. The cash flows grow at an irregular rate c. The cash flows grow for a finite period d. The cash flows grow at a constant rate

c. the cash flows grow for a finite period d. the cash flows grow at a constant rate

The name for a perpetuity in Canada and the United Kingdom is a ___.

consol

The present value of a(n) _______ of C dollars per period for t periods when the rate of return or interest rate, r, is given by: C × (1 − [1/(1 + r)t]r/)

annuity

Which of the following should be valued using a perpetuity formula? a. cash flows from a product whose sales are expected to remain constant forever b. a consol (bond that pays interest only and does not mature) c. preferred stock d. An amortized loan with a set amount over a period of time

a, b, and c An amortized loan has a maturity date, and therefore is not a perpetuity.

Which of the following are real-world examples of annuities? a. Mortgages b. Pensions c. Common stock dividends

a. Mortgages and b. Pensions

Which of the following processes can be used to calculate future value for multiple cash flows? a. Compound the accumulated balance forward one year at a time. b. Discount all of the cash flows back to Year 0. c. Calculate the future value of each cash flow first and then add them up. d. Find the future value of a single lump sum account.

a. compound the accumulated balance forward one year at a time; c. Calculate the future value of each cash flow first and then add them up

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually. a. effective b. stated c. nominal d. implicit

a. effective

For a positive stated annual interest rate and multiple compounding periods per year, the EAR is always _____ the APR. a. larger than b. smaller than c. equal to

a. larger than

Which of the following are annuities? a. monthly rent payments in a lease b. monthly grocery bill c. Installment loan payments d. tips to a waiter

a. monthly rent payments and c. installment loan payments These are both level cash flows out

C/r is the formula for the present value of a(n) ____. a. perpetuity b. annuity c. growing annuity d. growing perpetuity

a. perpetuity

Which of the following is true about a growing annuity? a. the cash flows grow at a constant rate b. the cash flows grow for a finite period c. the cash flows grow at an irregular rate d. the cash flows grow for an infinite period

a. the cash flows grow at a constant rate b. the cash flows grow for a finite period

The ______ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.

annual