Exam 1 chap 6

15. Which one of the following statements related to annuities and perpetuities is correct? A. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. B. A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments given equal discount rates. C. Most loans are a form of a perpetuity. D. The present value of a perpetuity cannot be computed but the future value can. E. Perpetuities are finite but annuities are not.

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

7. A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. Amortized. B. Continuous. C. Balloon. D. Pure discount. E. Interest-only.

D. Pure discount

3. A Canadian consol is best categorized as: A. An ordinary annuity. B. An amortized cash flow. C. An annuity due. D. A discounted loan. E. A perpetuity.

E. A perpetuity.

8. Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. Amortized loan. B. Modified loan. C. Balloon loan. D. Pure discount loan. E. Interest-only loan.

E. Interest-only loan.

20. 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? A. Annual B. Semiannual. C. Monthly. D. Daily. E.Continuous.

A. Annual

4. The interest rate that is most commonly quoted by a lender is referred to as which one of the following? A. Annual percentage rate. B. Compound rate. C. Effective annual rate. D. Simple rate. E. Common rate.

A. Annual percentage rate.

9. Amortized loans must have which one of these characteristics? A. Either equal or unequal principal payments over the life of the loan. B. One lump-sum principal payment. C. Increasing payments over the life of the loan. D. Equal interest payments over the life of the loan E. Declining periodic payments

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

6. Your credit card charges you 1.5 percent interest per month. This rate when multiplied by 12 is called the: A. Effective annual rate. B. Annual percentage rate. C. Periodic interest rate. D. Compound interest rate. E. Period interest rate.

B. Annual percentage rate.

18. Which one of these statements related to growing annuities and perpetuities is correct? A. You can compute the present value of a growing annuity but not a growing perpetuity. B. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. C. The future value of an annuity will decrease if the growth rate is increased. D. An increase in the rate of growth will decrease the present value of an annuity. E. The present value of a growing perpetuity will decrease if the discount rate is increased.

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

16. Which one of the following statements related to loan interest rates is correct? A. The annual percentage rate considers the compounding of interest. B. When comparing loans you should compare the effective annual rates. C. Lenders are most apt to quote the effective annual rate. D. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. E.The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

B. When comparing loans you should compare the effective annual rates.

24. 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. A. Interest-only loan. B. Amortized loan with equal principal payments. C. Amortized loan with equal loan payments. D. Discount loan. E. Balloon loan where 50 percent of the principal is repaid as a balloon payment.

B. Amortized loan with equal principal payments.

23. An amortized loan: A. Requires the principal amount to be repaid in even increments over the life of the loan. B. May have equal or increasing amounts applied to the principal from each loan payment. C. Requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. D.Requires that all payments be equal in amount and include both principal and interest. E. Repays both the principal and the interest in one lump sum at the end of the loan term.

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

10. 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? A. Amortized loan. B. Continuing loan. C. Balloon loan. D. Pure discount loan. E. Interest-only loan.

C. Balloon loan.

5. 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? A. Stated rate. B. Discounted annual rate. C. Effective annual rate. D. Periodic monthly rate. E. Consolidated monthly rate.

C. Effective annual rate.

1. An ordinary annuity is best defined by which one of the following? A. Increasing payments paid for a definitive period of time. B. Increasing payments paid forever. C. Equal payments paid at the end of regular intervals over a stated time period. D. Equal payments paid at the beginning of regular intervals for a limited time period. E. Equal payments that occur at set intervals for an unlimited period of time.

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

12. 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. A. Both options are of equal value since they both provide $12,000 of income B. Option A has the higher future value at the end of year three. C. Option B has a higher present value at time zero. D. Option B is a perpetuity. E. Option A is an annuity.

C. Option B has a higher present value at time zero.

17. Which one of the following statements concerning interest rates is correct? A. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. B. The effective annual rate decreases as the number of compounding periods per year increases. C. The effective annual rate equals the annual percentage rate when interest is compounded annually. D. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. E. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

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

22. How is the principal amount of an interest-only loan repaid? A. The principal is forgiven over the loan period; thus it does not have to be repaid. B. The principal is repaid in decreasing increments and included in each loan payment. C. The principal is repaid in one lump sum at the end of the loan period D. The principal is repaid in equal annual payments. E. The principal is repaid in increasing increments through regular monthly payments.

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

21. The entire repayment of which one of the following loans is computed simply by computing one single future value? A. Interest-only loan. B. Balloon loan. C. Amortized loan D. Pure discount loan. E. Bullet loan.

D. Pure discount loan.

2. Which one of the following accurately defines a perpetuity? A. A limited number of equal payments paid in even time increments. B. Payments of equal amounts that are paid irregularly but indefinitely. C. Varying amounts that are paid at even intervals forever. D. Unending equal payments paid at equal time intervals. E. Unending equal payments paid at either equal or unequal time intervals.

D. Unending equal payments paid at equal time intervals.

14. 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 A. The cash flows for Project B are an annuity, but those of Project A are not. B. Both sets of cash flows have equal present values as of time zero. C. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three. D. Both projects have equal values at any point in time since they both pay the same amount in total. E. Project B is worth less today than Project A.

E. 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? A. Both projects have the same future value at the end of Year 4. B. Both projects have the same value at Time 0. C. Both projects are ordinary annuities. D. Project Y has a higher present value than Project X. E. Project X has both a higher present and a higher future value than Project Y.

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

11. 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? A. These annuities have equal present values but unequal future values. B. These two annuities have both equal present and future values. C. Annuity B is an annuity due. D.Annuity A has a smaller future value than annuity B. E. Annuity B has a smaller present value than annuity A.

E. Annuity B has a smaller present value than annuity A.

19. Which one of the following statements correctly defines a time value of money relationship? A. Time and future values are inversely related, all else held constant B. Interest rates and time are positively related, all else held constant C. An increase in a positive discount rate increases the present value. D. An increase in time increases the future value given a zero rate of interest. E. Time and present value are inversely related, all else held constant.

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