Fin Mgmt Ch 5
Find the future value of an annuity for $100 per year for 10 years at 10 percent per year.
$1593.74
Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?
(1+quoted rate/m)^m - 1
If the quoted interest rate is 2% per month (APR = 24%), what is the EAR?
26.82%
You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2-week period. What is our stated annual interest rate?
260.00%
The present value interest factor for a 30 year annuity with an interest rate of 10 percent per year is ___.
9.4269
the effective annual rate (EAR) takes into account the ___ of interest that occurs within a year.
Compounding
Which of the following is the appropriate excel function to convert a quoted rate of 12% compounded quarterly to an EAR?
EFFECT(0.12,4)
When finding the present or future value of an annuity using a financial calculator, the ___ should be entered as a percentage
Interest rate
The most common way to repay a loan is to pay ___.
a single fixed payment each period
A 30 year home mortgage is a classic example of
an ordinary annuity
Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
annual percentage rate
An annuity due is a series of payments that are made ___.
at the beginning of the period
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ___ of the period.
end
If the interest rate is greater than zero, the value of an annuity due is always ___ an ordinary annuity.
greater than
More frequent compounding leads to:
higher EARS
A perpetuity is a constant stream of cash flows for a(n) ___ period of time.
infinite
An ordinary annuity consists of a(n) ___ stream of cash flows for a fixed period of time.
level
The present value of an annuity due is equal to the present value of a(n) ___ annuity multiplied by (1+r).
ordinary
The entire principal of an interest-only loan is the:
original loan amount
The present value formula of a ___ is PV = C/r , where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a ___.
pure discount loan
With typical interest-only loans, the entire principal is:
repaid at some point in the future
An interest rate expressed in terms of the interest payments made each period is called a(n) ___.
stated interest rate quoted interest rate
Which on of these is a perpetuity
trust income of $1,200 a year forever
What is the present value of a perpetuity paying $150 at the end of each year at 8%.
$1875
Alice has $20,000 in an account that pays 8% per year. Alice wants to withdraw equal amounts at the end of the next 10 years. How much will Alice receive each year?
$2980.59
What is the present value of the following cash flow stream discounted at 6%? $100 in years 1 and 2 followed by $200 in years 3 and 4.
$509.68
Given an annuity that has a payment of $35 per year, an annual interest rate of 3%, and a present value of $130, it will last for ___ years.
4
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?
=PV(0.10,10,-100,0,0)
The interest rate charged per period multiplied by the number of periods per year is the ___
Annual percentage rate
Which of the following is NOT a way to amortize a loan?
Fixed interest payments only
Which of the following are real-world examples of annuities?
Leases Pensions Mortgages
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which of the following terms best describes these scholarship payments?
annuity due
In the excel setup of a loan amortization problem, which of the following occurs?
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)
Because of ___ and ___, interest rates are often quoted in many different ways.
tradition and legislation
The formula for the future value of an annuity factor is [(1+r)^t-1]/r.
true
What is the future value of $100 deposited each year for 2 years beginning next year, then $200 deposited for the next two years if you can earn 6% per year?
$643.46
Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10% yearly interest. How much is the second interest payment?
$80
When entering variables in an Excel function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says the outflows are negative values; inflows are positive values. For which variables is this a consideration?
Present value future value payment
True or False: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)^r)]}/r
true
True or False: When calculating the present value of an annuity using the financial calculator, you enter cash flows of the annuity in the PMT key
true