chapter 6 review in book
two ways to calculate a balloon payment?
-amortize the loan over the loan life to find the ending balance -find the present value of the payments remaining after the loan term
what processes can be used to calculate future value for multiple cash flows?
-calculate the future value of each cash flow first and then add them up -compound the accumulated balance forward one year at a time
what should be valued when using a perpetuity formula?
-cash flows from a product whose sales are expected to remain constant forever -preferred stock -a consol
what payment methods amortizes a loan?
-interest plus fixed amount -fixed payments that result in a zero loan balance
Ways to amortize a loan
-pay principal and interest every period in a fixed payment -pay the interest each period plus some fixed amount of the pricipal.
another common term for the effective annual rate is the
APY
example of a perpetuity?
a constant stream of cash flows forever
what is the simplest form of a loan?
a pure discount loan
an annuity date is a series of payments that are made ___
at the beginning of each period
when calculating the present value of multiple cash flows using a spreadsheet, you must
calculate the present value of each cash flow then add the discounted values together
the EAR takes into account the __ of interest that occurs within a year.
compoundign
one example of perpetuity is a British
consol
Given the same APR, more frequent compounding results in _____.
higher EARs
a perpetuity is a constant stream of cash flows for a ___ period of time
infinite
the most common way to repay a loan is to pay
interest plus fixed prinicipal amount every period
for a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ___ the APR.
larger than
the present value formula for a(n) ____ is PV = C/r, where C is the constant and regularly times cash flow to infinity, and r is the interest rate.
perpetuity
amortization is the process of paying off loans by regularly reducing the
principal
the original loan amount is called the
principal
because of ___ and ___, interest rates are often quoted in many differnt ways
tradition; legislation
another common name for the effective annual rate is the annual percentage
yield
in almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ___ of each period.
end
how frequently does continuous compounding occur?
every instant
Cash flows grow at an irregular rate in growing annuity. T/F
false
In a partial amortization loan, the amortization period is shorter than the loan period. T/F
false
T/F In the amortization of a fixed payment loan, the amount of interest and principal paid increases each period
false
the payments in a ___ amortization loan are NOT based on the life of the loan
partial
what type of amortization is most commonly used in the real world for mortgages and car loans?
fixed payment
a single cash flow is also known as a
lump sum
what are some examples of real-world annuities?
mortgages and pensions
the present value of an annuity due is equal to the present value of a ___ annuity multiplied by (1+r).
ordinary
with interest-only loans that are not perpetuities, the entire principal is:
repaid at some point in the future
interest paid twice a year is known as ___ compounding
semi-annual
if the interest rate is greater than zero, the value of an annuity due is always ___ an ordingary annuity.
greater than
APR definiton
the interest rate per period multiplied by the number of periods in the year
EAR definition
the interest rate stated as though it were compounded once per year.
In a partial amortization loan, the monthly payments do not fully pay off the loan by the end of the loan period. TF
true
T/F In the amortization of a fixed payment loan, the payment amount decreases each period.
false
cash flows grow for an infinite period in growing annuity. T/F
false
the future value of $100 at 10 percent compounded semiannualy is ____ the future value of $100 at 10 percent compounded annually
greater than
the loan balance on partial amortization loans declines so slowly because the
payments are mostly interest
In a partial amortization loan, the amoritzation period is longer than the loan period. T/F
true
T/F In the amortization of a fixed payment loan, the principal amount paid increases each period
true
consol
bond that pays interest only and does not mature
when using the spreadsheet (Excel) function for finding the PV of an annuity, its a good idea to enter the ___ as a negative value
payment
In a partial amortization loan, the borrower makes a large balloon payment at the end of the loan period. T/F
true
in the Excel setup of a loan amortization problem, what occurs>
-payment is found using PMT(rate, nper, -pv, fv) -to find pricipal, subtract interest payment from total payment
which compounding interval will result in the lowest future value assuming everythign else is held constant?
annual
a lump sum payment to pay off the balance of a partially amortized loan is called a __ payment
balloon or bullet
payday loans allow you to
borrow now and repay later
compared to a comparable fixed payment loan, the total interest on a fixed principal loan is
less
In a partial amortization loan, the monthly payment is based on a longer amortization period than the maturity of the loan. T/F
true
T/F In the amortization of a fixed payment loan, the amount of interest paid decreases each period
true
cash flows grow at a constant rate in growing annuity. T/F
true
cash flows grow for a finite period in growing annuity. T/F
true
