Chapter 6 (slide terms) FINAnnuity

Which rate should you use to compare alternative investments or loans?

EAR

Amortized loans must have which one of these characteristics over its life?

Either equal or unequal principal payments

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.

Effective Annual Rate (EAR)

This is the actual rate paid (or received) after accounting for compounding that occurs during the year

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

When comparing loans you should compare the effective annual rates.

A(n) ____ loan has regular payments that include both principal and interest but these payments are insufficient to pay off the loan.

balloon

Multiple cash flows are moved...

both forward in time and into present value just like single payments

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.

effective annual

Annuity

finite series of equal payments that occur at regular intervals

Perpetuity

infinite series of equal payments

An amortized loan:

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

If the first payment occurs at the end of the period, it is called an

ordinary annuity

Loans can be...

pure discount, interest only, or amortized - with fixed principal or fixed payments

With an interest-only loan the principal is:

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

Effective Annual Rate and Annual Percent Rate are

two methods to determine the cost of a loan

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ____ loan.

interest-only

which rate do you need to use in the time value of money calculations

period rate and use APR to get it (if not given)

By definition APR =

period rate times the number of periods per year

A Canadian consol is best categorized as a(n):

perpetuity.

The interest rate that is most commonly quoted by a lender is referred to as the:

APR

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

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

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

Consequently, to get the period rate we rearrange the APR equation

Period rate = APR / number of periods per year

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.

annual percentage

If the first payment occurs at the beginning of the period, it is called an

annuity due

Annuities are a special case of...

multiple cash flows in that they are a "fixed, equal, uninterrupted series of payments or receipts"

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 a(n) _____ loan is computed simply by computing one single future value.

pure discount

Treasury bills are excellent examples of

pure discount loans. The principal amount is repaid at some future date, without any periodic interest payments.