FIN 311 ch6
Which of the following should be valued using a perpetuity formula?
A consol (bond that pays interest only and does not mature) Cash flows from a product whose sales are expected to remain constant forever Preferred stock
Which of the following is a perpetuity?
A constant stream of cash flows forever
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
Which of the following are annuities?
Installment loan payments Monthly rent payments in a lease
Which of the following are real-world examples of annuities?
Pensions Mortgages
Which of the following is true about a growing annuity?
The cash flows grow at a constant rate. The cash flows grow for a finite period.
The US government borrows money by issuing:
Treasury bonds Treasury bills Treasury notes
The _________ future value factor is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
The formula for the ________ present value is C × [(1 − Present value factor)/r].
annuity
an annuity for which the cash flows occur at the beginning of each period.
annutity due
An annuity due is a series of payments that are made ____.
at the beginning of each period
When calculating the future value of multiple cash flows using a spreadsheet, you must:
calculate the future value of each cash flow then add the compounded values together
How frequently does continuous compounding occur?
every instant
Given the same APR, more frequent compounding results in _____.
higher EARs
Most investments involve _____ cash flows.
multiple
A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) for many years.
outflow, inflows
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.
semiannually For continuous compounding, EAR=e0.07-1=7.251%. For semiannual compounding, EAR = (1 + 0.07/2)2 - 1 = 7.12%
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
The formula for the present value interest factor for annuities is Annuity present value factor = {1-[1/(1+r)t]}r1-[1/(1+r)t]r.
true
Semiannual compounding means that interest is paid ______ per year.
two times
The ________ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years.
2 to 30
Which of the following 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
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.
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
In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the (beginning/end) of each period.
end
A growing annuity has a(n) ____.
finite number of growing cash flows
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
When the U.S. government wants to borrow money for the long-term (more than one year) it issues:
Treasury notes Treasury bonds
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
