Ch.6 Conceptual

A Canadian consol is best categorized as:

A perpetuity

Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments given equal discount rates.

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.

Amortized loan with equal principal payments.

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at year 5 and an annual percentage rate of 10 percent?

Annual

The interest rate that is most commonly quoted by a lender is referred to as which one of the following?

Annual Percentage rate

Your credit card charges you 1.5 percent interest per month. This rate when multiplied by 12 is called the:

Annual percentage rate

You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Annuity B has a smaller present value than annuity A.

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?

Balloon loan

An ordinary annuity is best defined by which one of the following?

Equal payments paid at the end of regular intervals over a stated time period.

An interest rate on a loan that is compounded monthly but expressed as an annual rate would be an example of which one of the following rates?

Effective Annual rate

Amortized loans must have which one of these characteristics?

Either equal or unequal principal payments over the life of the loan.

An amortized loan

May have equal or increasing amounts applied to the principal from each loan payment.

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.

Option B has a higher present value at time zero.

Which one of the following statements is correct given the following two sets of project cash flows? Assume a positive discount rate. Project A Project B Year 1 $4,000 $2,000 Year 2 3,000 3,000 Year 3 0 2,000 Year 4 3,000 3,000

Project B is worth less today than Project A.

You are considering two projects with the following cash flows: Project X Project Y Year 1 $8,500 $7,000 Year 2 8,000 7,500 Year 3 7,500 8,000 Year 4 7,000 8,500 Which one of the following statements is true concerning these two projects given a positive discount rate?

Project X has both a higher present and a higher future value than Project Y.

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

Pure Discount

The entire repayment of which one of the following loans is computed simply by computing one single future value?

Pure discount loan

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

How is the principal amount of an interest-only loan repaid?

The principal is repaid in one lump sum at the end of the loan period.

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

Which one of the following accurately defines a perpetuity?

Unending equal payments paid at equal time intervals.

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

interest only loan