Fin 3716 Exam 2 Joseph Mason

If you invest for a single period at an interest rate of r, your money will grow to __________ per dollar invested.

(1 + r)

In the Excel setup of a loan amortization problem, what two things occur?

To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. The payment is found with = PMT(rate, nper, -pv, fv).

Why is a dollar received today worth more than a dollar received in the future?

Today's dollar can be reinvested, yielding a greater amount in the future.

True or false: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.

True

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: Interest rates can be quoted in various ways.

True

True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.

True

True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

True

True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

True

The most common way to repay a loan is to pay

a single fixed payment every period

An annuity with payments beginning immediately rather than at the end of the period is called an

annuity due

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

because the $100 is an outflow from you which should be negative

The process of accumulating interest in an investment over time to earn more interest is called

compounding

Calculating the present value of a future cash flow to determine its worth today is commonly called _____________ valuation.

discounted cash flow (DCF)

One step in calculating an EAR is to ___________ the quoted rate by the number of times that the interest is compounded.

divide

The _________ annual rate is the interest rate expressed as if it were compounded once per year.

effective (EAR)

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _________ of each period

end

True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.

false

True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.

false

True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.

false

True or false: To find the annuity future value factor, you only need the cash flows and the discount rate.

false

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

false

Which of the following is not a way to amortize a loan? fixed interest payments only fixed payments interest plus fixed amount

fixed interest payments only

The amount an investment is worth after one or more periods is called the _________ value.

future

When finding the present or future value of an annuity using a financial calculator, the ________ should be entered as a percentage

interest rate

When finding the present or future value of an annuity using a spreadsheet, the ___________ should be entered as a decimal.

interest rate

When dealing with compound interest, it is more financially advantageous to have a (shorter/longer) time horizon for investment.

longer

The annuity present value factor equals one (plus / minus) the present value factor all divided by the discount rate.

minus

The present value of an annuity due is equal to the present value of a(n) ________ annuity multiplied by (1 + r).

ordinary

The _______ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

payment (PMT)

The __________ present value can be found using the perpetual cash flow and the discount rate.

perpetuity

With discounting, the resulting value is called the _________ value, while with compounding the result is called the _________ value.

present; future

with ___________ interest, the interest is not reinvested.

simple

Time value of money tables are not as common as they once were because: (2)

they are available for only a relatively small number of interest rates. it is easier to use inexpensive financial calculators instead.

The real world has moved away from using ______ for calculating future and present values.

time value of money tables

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.

true

The cash flows of an annuity due are the same as those of an ordinary annuity except that there is an extra cash flow at Time _______

zero

Which of the following processes can be used to calculate the future value of multiple cash flows? -Calculate the future value of each cash flow first and then sum them. -Compound the accumulated balance forward one year at a time. -Discount all of the cash flows back to Year 0. -Find the future value of a single lump-sum amount.

-Compound the accumulated balance forward one year at a time. -Calculate the future value of each cash flow first and then sum them.

Which of the following is a way to amortize a loan? -Pay both interest and principal in one lump sum at maturity. -Pay the interest each period plus some fixed amount of the principal. -Pay the principal and interest every period in a fixed payment. -Pay only the interest every period and pay the principal off at maturity.

-Pay the interest each period plus some fixed amount of the principal. -Pay the principal and interest every period in a fixed payment.

Which of the following are real-world examples of annuities? -common stock dividends -leases -mortgages -pensions

-leases -mortgages -pensions

When entering variables in a spreadsheet function (or in a financial calculator), the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration? payment interest rate present value number of periods future value

-payment -present value -Future value

For a given time period (t) and interest rate (r), the present value factor is ________ the future value factor.

1 divided by the reciprocal of

Can these four be evaluated as annuities or annuities due? (yes/no) 1. Monthly Electric Bills 2. Installment loan payments 3. Tips to a Waiter 4. Monthly rent payments within a lease

1. No 2. Yes 3. No 4. Yes

Which of the following is the correct Excel function to calculate the present value of $300 due in five years at a discount rate of 10 percent?

= PV(0.10,5,0,-300)

The interest rate charged per period multiplied by the number of periods per year is equal to _______ _______ _______ on a loan

Annual percentage rate (APR)

Future value is the ________ value of an investment at some time in the future.

Cash

Using the PV, discount rate, and _____________ you can determine the number of periods. (Enter abbreviation only.)

FV

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

False

True or false: The annual percentage rate (APR) is calculated as the interest rate charged per period on a loan divided by the number of periods per year.

False

True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.

False

True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

False

You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the __________ value on the financial calculator.

N