Finance 6301 - Chapter 4

A stream of cash flows that grows at a constant rate for a finite period is called a(n) _______. 1. growing annuity 2. annuity 3. growing perpetuity 4. perpetuity

1. growing annuity An annuity is a given stream of cash flows for a finite period. A growing perpetuity is a stream of cash flows that grows at a constant rate into perpetuity. A perpetuity is a given stream of cash flows into perpetuity.

A 3-year loan is structured as an interest-only loan with quarterly payments. Each payment during the first year will include an amount for _______. 1. interest only 2. principal only 3. both interest and principal

1. interest only

A delayed annuity (or perpetuity) is one that begins _______. 1. many periods in the future 2. only one period in the past 3. many periods in the past 4. only one period in the future

1. many periods in the future A delayed annuity (or perpetuity) is one that begins many periods in the future. The standard annuity formula assumes payments begin one period in the future.

Assume $10 invested today will be worth $64 in 25 years. Which one of these is the correct formula for computing the interest rate on this investment? 1. r = ($64/$10)^(1/25) - 1 2. r = 1 + ($64/$10)^1/25 3. r = ($64/$10)^(25) -1 4. r = 1 + ($64/$10)^25

1. r = ($64/$10)^(1/25) - 1

One of the most basic principles of finance is that rational individuals prefer to receive a dollar _______ than a dollar _______. 1. today; tomorrow 2. today; yesterday 3. tomorrow; today

1. today; tomorrow Rational individuals prefer a dollar today to a dollar tomorrow, because they can invest that dollar and have more than a dollar tomorrow.

To find the future value annuity factor from a time value of money table, read down the rows to find T = 10 and across the columns to find 10 percent. The factor where that column and row intersect is _______. 1. 14.676 2. 16.882 3. 17.919 4. 15.937

4. 15.937 To find the future value annuity factor from a time value of money table, read down the rows to find T = 10 and across the columns to find 10 percent. The factor where that column and row intersect is 15.937.

The value of a future cash flow stated in today's dollars is referred to as the _______. 1. past value 2. present value 3. inflated 4. real

2. present value The value of a future cash flow stated in today's dollars is referred to as the present value.

A borrower receives $7,500 today and repays a single lump sum in nine months. This simple form of loan is called _______. 1. the delayed payback loan 2. the pure discount loan 3. the interest only loan 4. a collateral loan

2. the pure discount loan With a pure discount loan, the borrower receives money today and repays a single lump sum at some time in the future.

Semiannual compounding means that interest is paid _______ per year. 1. three times 2. two times 3. one time 4. twelve times

2. two times

Suppose an investment of $100 will return $148 after 10 years, what is the interest rate implied in this scenario? (round to the nearest whole percent) 1. 1.67% 2. 10% 3. 6% 4. 4%

4. 4% Reason: 100 +/- PV; 148 FV; 10 N; CPT I/Y = 3.998%

To find the present value of an annuity of $500 per year for 5 years at 7 percent per year using the tables, look up the present value interest factor which is _______ and multiply that by _______. 1. 7.4349; 50 2. 5.7864; $500 3. 4.7665; 50 4. 4.10020; $500

4. 4.10020; $500 To find the present value of an annuity of $500 per year for 5 years at 7 percent per year using the tables, look up the present value interest factor which is 4.10020 and multiply that by $500.

The most common way to repay a loan is to pay _______. 1. a lump sum of interest and principal at the end of the loan 2. just interest every period 3. interest plus a fixed principal amount every period 4. a single fixed payment every period

4. a single fixed payment every period The most common way to repay a loan is to pay a single fixed payment every period, consisting of an interest payment and some amount of principle each period.

An annuity in which the first payment or receipt occurs immediately is known as an _______. 1. perpetuity 2. effective annuity 3. ordinary annuity 4. annuity due

4. annuity due

The annual percentage rate is the annual interest rate without consideration of _______. 1. discounting 2. multiplying 3. dividing 4. compounding

4. compounding The annual percentage rate is the annual interest rate without consideration of compounding.

A finite number of growing cash flows describes which of the following? 1. annuity due 2. ordinary annuity 3. perpetuity 4. growing annuity

4. growing annuity A growing annuity has a finite number of growing cash flows.

A perpetuity is a constant stream of cash flows for a(n) _______ period of time. 1. undetermined 2. random 3. finite 4. infinite

4. infinite A perpetuity is a constant stream of cash flows for an infinite time period.

In an infrequent annuity, the payments occur _______. 1. more than twice a year 2. more than once a year 3. exactly once a year 4. less than once a year

4. less than once a year

If reinvestment of interest or dividends does not occur, then the future value of an investment will be _______ and the realized yield will be _______ than if reinvestment had occurred. 1. lower; higher 2. higher; higher 3. higher; lower 4. lower; lower

4. lower; lower If there is no reinvestment, there will be less money in the investment at the end of the time period, so the realized yield will be less.

Amortization is the process of paying off loans by regularly reducing the _______. 1. life of the loan 2. interest rate 3. payment frequency 4. principal

4. principal Amortization is the process of paying off loans by regularly reducing the principal.

The interest rate (r) used in the general compounding formula is the _______ interest rate. 1. prime 2. periodic 3. effective 4. quoted

4. quoted The interest rate (r) used in the general compounding formula is the quoted interest rate.

Assume $10 invested today will be worth $64 in 25 years. Which one of these is the correct formula for computing the interest rate on this investment? 1. r = ($64/$10)25 -1 2. r = 1 + ($64/$10)^25 3. r = 1 + ($64/$10)^1/25 4. r = (($64/$10)^1/25) - 1

4. r = (($64/$10)^1/25) - 1

Present value represents what an amount of money promised or expected in the future is worth _______. 1. next month 2. next year 3. last year 4. today

4. today Present value represents what an amount of money promised or expected in the future is worth today.

The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) _______ type of cash flow. 1. consol 2. uneven 3. annuity 4. perpetuity

2. uneven The cash flows for an annuity must happen at regular intervals. These do not (week, month, year).

Which one of the following constitutes an infrequent annuity? 1. $100 every year 2. $100 in random time periods 3. $100 once every 2 years 4. $100 every month

3. $100 once every 2 years In an infrequent annuity, the payments occur less than once a year, so this is not an infrequent annuity.

Teresa has $100,000 in an annuity account that pays 10 percent per year. How much will she receive annually if she withdraws an equal amount over the next 20 years? 1. $39,786 2. $14,563 3. $11,746 4. $22,098

3. $11,746 Calculate the payment using the PV of an annuity at 10% for 20 years. $100,000/[(1 - 1/1.10^20)/.10] = $11,746

What is the future value of $100 at 10 percent simple interest for 2 years? 1. $121.20 2. $121 3. $120 4. $120.68

3. $120 $100 + 2(.10 × $100) = $120

If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years? 1. $130.00 2. $131.00 3. $133.10 4. $121.00

3. $133.10 Reason: $130.00 is the result of simple interest, not compound interest. FV = $100 × 1.103 = $133.10

If you invest $10,000 and your NPV is $4,000, then the present value of your future cash flows is _______. 1. $6,000 2. $11,500 3. $14,000 4. $24,000

3. $14,000 Reason: NPV = -Cost + PV → PV = NPV + Cost PV = $4,000 + 10,000 = $14,000

An interest only loan of $10,000, 8% interest rate, for 5 years would require yearly interest payments of _______. 1. $500 2. $320 3. $800 4. $160

3. $800 $10,000 x.08 =$800

What is the present value of $100 each year for 20 years at 10 percent per year? 1. $948.54 2. $1,880.09 3. $851.36 4. $1,422.53

3. $851.36 $100{[1 - (1/(1.10)20)]/0.10}= $851.36

Which of the following is a perpetuity? 1. A growing stream of cash flows for a fixed period 2. An undulating stream of cash flows forever 3. A constant stream of cash flows forever 4. A constant stream of cash flows for a fixed period

3. A constant stream of cash flows forever

Select all that apply What are the implications of the time value of money concept? 1. A dollar has the same value no matter which day it is 2. A dollar today is worth less than a dollar tomorrow 3. A dollar today is worth more than a dollar tomorrow 4. A dollar tomorrow is worth less than a dollar today

3. A dollar today is worth more than a dollar tomorrow 4. A dollar tomorrow is worth less than a dollar today A dollar today is worth more than a dollar tomorrow, because you can invest it and have more than a dollar tomorrow.

Which of the following represents an infinite and constant stream of cash flows? 1. A growing perpetuity 2. A growing annuity 3. A perpetuity 4. An annuity

3. A perpetuity A growing perpetuity does not have a constant stream of cash flows. A growing annuity has neither a constant nor an infinite stream of cash flows. An annuity does not have an infinite stream of cash flows.

Which of the following is the formula for the present value of a growing perpetuity? 1. C(1 + g)/r 2. C/(r + g) 3. C/(r - g) 4. C × r × g

3. C/(r - g)

A dollar tomorrow is worth _______ a dollar today. 1. the same as 2. more than 3. less than

3. less than A dollar tomorrow is worth less than a dollar today, because if you invest the dollar you have today, you'll have more than a dollar tomorrow.

The payments in a _______ amortization loan are NOT based on the life of the loan. 1. federal 2. full 3. partial 4. remunerative

3. partial The payments in a partial amortization loan are NOT based on the life of the loan.

When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the _______ as a negative value. 1. interest rate 2. number of periods 3. payment 4. type of annuity

3. payment When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the payment as a negative value. Either the payment or the PV must be negative.

A 5-year loan that is repaid in a single lump sum at the end of the loan term is called a(n) _______ loan. 1. partially amortized 2. compound 3. pure discount 4. inflation-only

3. pure discount

An effective annual rate of 7.12 percent is equal to 7 percent compounded ______. 1. daily 2. continuously 3. semiannually 4. quarterly

3. semiannually Daily: EAR = (1 + .07/365)^(365) - 1 = 7.25% Continuously: EAR =e^(0.07*1) - 1 = 7.251% Semiannually (correct): EAR = (1 + .07/2)^(2) - 1 = 7.12% Quarterly: EAR = (1 + .07/4)^(4) - 1 = 7.19%

What is the difference in the future value of $100 at 7 percent interest for 5 years if the interest is compounded semiannually rather than annually? 1. $1.03 2. $.67 3. $.91 4. $.80

4. $.80 ($100 × 1.03510) - ($100 × 1..075) = $.80

If you invest $1,000 and your NPV is $200, then the present value of your future cash flows is _______. 1. $1,500 2. $800 3. $500 4. $1,200

4. $1,200 Reason: NPV = -Cost + PV → PV = NPV + Cost PV = $200 + 1,000 = $1,200

What is the future value of $100 compounded for 50 years at 10 percent annual interest? 1. $14,987.45 2. $868.85 3. $500.00 4. $11,739.09

4. $11,739.09 FV = $100 × 1.1050 = $11,739.09

What is the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year? 1. $300.00 2. $269.73 3. $288.88 4. $248.69

4. $248.69 Reason: $100{[1 - (1/(1.10)^3)]/.10}

If you invest $50 at a stated annual rate of 10 percent compounded monthly, how much more money will you have in 10 years than if the rate was compounded annually? 1. $9.13 2. $2.71 3. $1.43 4. $5.66

4. $5.66 $50 × (1 + .10/12)120 - $50 × (1.10)10 = $5.66

If the future value is $750 in 1 year and the interest rate is 15 percent, what is the present value? 1. $845.27 2. $862.50 3. $670.39 4. $652.17

4. $652.17 Future Value/ (1+Interest Rate) = Present Value $750/1.15 = $652.17

Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10 percent annual interest. How much is the interest payment in the second year of the loan? 1. $66 2. $40 3. $120 4. $80

4. $80 Reason: You are re-paying $400 each year. Interest is computed on the principal outstanding for the year, which is ($1,200 - 400) = 800. $800 × 0.1 = $80

If you invest $100 at a stated annual rate of 10 percent compounded quarterly, how much more money will you have in 10 years than if the rate was compounded annually? 1. $7.56 2. $3.43 3. $5.71 4. $9.13

4. $9.13 $100 × (1 + .10/4)^(40) - $100 × (1.10)^(10) = $9.13

If the interest rate is 10% per year, then what is today's value of $100 received one year from today? 1. $110.00 2. $86.78 3. $90.00 4. $90.91

4. $90.91 PV = $100/1.10 = $90.91

If you invest $1,000 and the present value of the incoming cash flows over the following year is $800, then the NPV is _______. 1. +$200 2. $800 3. $1,800 4. -$200

4. -$200 NPV = -$1,000 + 800 = -$200

When using a spreadsheet to determine a payment for an amortized loan, and interest rate of 8 percent would be input as 1. 8% 2. 8/12 3. 8 x 12 4. .08

4. .08 Reason: input as a decimal (i.e. .08 = 8/100)

Select all that apply Which of the following is a means of calculating an interest rate? 1. a time value of money table 2. algebra 3. linear regression 4. a calculator

1. a time value of money table 2. algebra 4. a calculator

An annuity due is a series of payments that are made _______. 1. at the beginning of each period 2. any time in the future 3. 1 year in the past 4. 1 year hence

1. at the beginning of each period

The idea behind _______ is that interest is earned on interest. 1. compounding 2. reinsurance 3. simplification 4. rebounding

1. compounding The idea behind compounding is that interest is earned on interest.

To contrast the annual percentage rate (APR) with the effective annual rate the _______ must be known. 1. compounding interval 2. nominal interest rate 3. quarterly rate 4. future value

1. compounding interval

A fixed payment loan has a fixed payments but the interest amount paid _______ over the life of the loan. 1. decreases 2. increases

1. decreases

Which of the following refers to an annuity beginning many periods in the future? 1. delayed annuity 2. consol annuity 3. deferred annuity 4. annuity due

1. delayed annuity A delayed annuity (or perpetuity) is one that begins many periods in the future.

A growing annuity has a(n) _______. 1. finite number of growing cash flows 2. finite number of level cash flows 3. infinite number of growing cash flows 4. infinite number of constant cash flows

1. finite number of growing cash flows

The total value of an investment earning interest over one or more periods is known as the _______. 1. future value 2. total sum 3. present value 4. discounted value

1. future value A future value is the amount to which an investment will grow after earning interest. present value

You invest $100 today. With positive interest rates, the concept of future value implies that the future value of your $100 will be _______ $100. 1. greater than 2. exactly 3. less than

1. greater than If interest rates are positive, $100 given to you today will be worth more than $100 in the future (for example, if the interest rate is 5%, your $100 will be worth $100 x (1 + .05)1 = $105 in one year.

The future value of $100 at 10 percent compounded semiannually is _______ the future value of $100 at 10 percent compounded annually. 1. greater than 2. less than 3. equal to

1. greater than The future value of $100 at 10 percent compounded semiannually is greater than the future value of $100 at 10 percent compounded annually, because interest is earned on the first six months' interest during the entire time period.

True or False: Receiving $10 today has the same value as receiving $1 today and $9 one year from now. True False

False You could invest nine extra dollars now and have more than nine dollars a year from now.

The formula for finding the present value of a cash outflow now, a positive cash flow in 1 year, and a positive cash flow in years 2 and 3 is -C0+ C1/(1 + r)1 + C2/(1 + r)2 + C3/(1 + r)3 True False

True Present value is the sum of the discounted cash flows over time.

True or False: The formula for finding the net present value of a cash outflow now, a positive cash flow in 1 year, and a positive cash flow in 2 years is -C0+ C1/(1 + r)^1 + C2/(1 + r)^2. True False

True Present value is the sum of the discounted cash flows over time.

True or False: A one-period formula for present value is PV = C1/(1 + r). True False

True Reason: PV = C1/(1 + r). Either FV or C1 can be used to designate the cash flow in Year 1.

True or False: The spreadsheet (Excel) formula for calculating the present value of $100 at the end of each year for 2 years at 10 percent per year is: PV(.1,2,-100,0). True False

True The input is correct. You can check out the fx function key in Excel to verify this.

True or False: More money can be earned with compound interest than with simple interest. True False

True With compound interest, you earn interest on interest as well as interest on the principal.

The _______ _______ allows for a borrowed amount to be paid off with payments that regularly reduce the principal amount.

amortized loan

The _______ _______ _______ is the interest rate that ignores compounding.

annual percentage date

If you earn 8 percent a year compounded annually for 7 years on a $1,000 present value, your future value will be ____. 1. $1,713.82 2. $1,652.39 3. $1,481.95 4. $1,540.67

1. $1,713.82 FV = $1,000(1.08)7 = $1,713.82

Suppose you paid off a $1,200 loan by paying $400 in principal each year plus 10 percent annual interest over a 3-year period. What is the total payment (interest plus principal) in Year 3? 1. $440 2. $400 3. $800 4. $1,320

1. $440 $400 + ($1,200 - 800) × .10 = $440

If the future value is $500 in 1 year and the interest rate is 12 percent per year, what is the present value? 1. $446.43 2. $462.18 3. $512 4. $488

1. $446.43 $500/1.12 = $446.43

You invest $500 at 10 percent interest per annum. At the end of 2 years with simple interest, you will have _______ and with compound interest, you will have _______. 1. $600; $605 2. $550; $600 3. $605; $600 4. $550; $605

1. $600; $605 Simple interest = 500(0.10)=$50 per year. Times two years = $100 total. Adding the original principal yields $600. With compound interest, the total is $500(1.10)2 = $605. The FV will always be higher with compound interest.

If you invest $1,000 and the present value of the expected cash inflows is $1,300, then the NPV is _______. 1. +$300 2. -$300 3. $1,300 4. $2,300

1. +$300 NPV = -$1,000 + 1,300 = $300

To find the future value annuity factor using the time value of money table, read down the rows to find T = 2, then across the columns for an interest rate of 10 percent. The intersection of that row and column will show the factor _______. 1. 2.100 2. 2.220 3. 2.101 4. 3.113

1. 2.100 To find the future value annuity factor using the time value of money table, read down the rows to find T = 2, then across the columns for an interest rate of 10 percent. The intersection of that row and column will show the factor 2.10.

To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using the tables, look up the present value interest factor which is _______ and multiply that by _______. 1. 6.1446; $100 2. 7.4349; 10 3. 6.7590; $100 4. 5.7590; 10

1. 6.1446; $100 To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using the tables, look up the present value interest factor which is 6.1446 and multiply that by $100.

What is the general compounding formula for calculating the annual return on an investment when there is more than one compounding period in a year? 1. C0(1 + r/m)^m 2. C0(1 + r)^m 3. C0(1 + rm) 4. C0rm

1. C0(1 + r/m)^m

The future value formula is _______. 1. FV = C0 × (1 + r)τ 2. FV = C0 /(1 + r)τ 3. FV = C0/(1 + r) 4. FV = C0/r

1. FV = C0 × (1 + r)τ

Which type of amortization is most commonly used in the real world for mortgages and car loans? 1. Fixed payment 2. Fixed principal 3. Fixed interest 4. Variable period

1. Fixed payment

Which one of the following is the correct formula for the one-period present value? 1. PV = FV/(1 + r) 2. PV = FV/(1 + r) 3. PV = FV/(1 + r) 4. PV = FV/(1 + r)

1. PV = FV/(1 + r) Reason: PV = FV/(1 + r)

Select all that apply Which of the following are ways to amortize a loan? 1. Pay principal and interest every period in a fixed payment. 2. Pay only interest every period and pay the principal off at maturity 3. Pay both interest and principal in one lump sum at maturity 4. Pay the interest each period plus some fixed amount of the principal.

1. Pay principal and interest every period in a fixed payment. 4. Pay the interest each period plus some fixed amount of the principal.

Select all that apply Which of the following are true about the amortization of a fixed payment loan? 1. The amount of interest paid decreases each period. 2. The amount of interest and principal paid increases each period. 3. The payment amount decreases each period. 4. The principal amount paid increases each period.

1. The amount of interest paid decreases each period. 4. The principal amount paid increases each period. In amortization of a fixed payment loan, the amount of interest paid each period decreases, and the principal amount paid each period increases.

Select all that apply Which of the following are commonly used methods of computing an interest rate for a one-period time value of money problem in an introductory finance class? 1. Time value of money table 2. Algebraic formula 3. Calculator 4. Counting on your fingers

1. Time value of money table 2. Algebraic formula 3. Calculator

Given an interest rate of 8%, how much should you invest now in order to produce $3,000 at the end of the year? 1. $3,000 2. $2,778 3. $2,400 4. $2,912

2. $2,778 $3,000/(1.08) =$2,778

If you invest $100 at 10 percent simple interest, how much will you have in 10 years? 1. $259.37 2. $200 3. $220 4. $245.84

2. $200 Reason: $259.37 is the result of compound interest, not simple interest. FV = $100 + 10($100 × .10) = $200

Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year? 1. $412.98 2. $402.11 3. $397.66 4. $405.63

2. $402.11 Calculate the payment using the PV of an annuity at 10% for 3 years. $1,000/[(1 - 1/1.10^3)/.10] = $402.11

Which of the following gives an effective annual yield of 12.36 percent? 1. 12%, compounded quarterly 2. 12%, compounded semiannually 3. 12%, compounded monthly 4. 12%, compounded annually

2. 12%, compounded semiannually Quarterly: EAR = (1+0.12/4)^(4)-1=12.55% Monthly: EAR = (1+0.12/12)^(12)-1=12.68% Annually: EAR = (1+0.12/1)^(1)-1=12.0%

The present value interest factor for a 30-year annuity with an interest rate of 10 percent per year is ______. 1. .0573 2. 9.4269 3. .1486 4. 8.5136

2. 9.4269 Reason: [1 - (1/1.10^30)]/.10] = 9.4269

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____. 1. 7.0038 2. 9.8181 3. 11.4906 4. 10.2536

2. 9.8181 Reason: [1-(1/1.08^20)]/.08 = 9.8181

The simple interest rate of 9.99% on $1 is _______ per year and _______ total interest over 93 years. Conversely, 9.99% compounded annually for 93 years is approximately $7,030.31. 1. 9.99 dollars; $99.94 2. 9.99 cents; $9.29 3. $1.09; 99.99 cents 4. 93 cents; 92.90 dollars

2. 9.99 cents; $9.29 9.99 cents; $9.29 (= 93 x $.09999)

Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year? 1. =PV(10,-100,.1,0,0) 2. =PV(.10,10,-100,0,0) 3. =PV(100,.1,0,10,0)

2. =PV(.10,10,-100,0,0)

Select all that apply Which of the following payment methods amortizes a loan? 1. Fixed interest payments only 2. Fixed payments that result in a zero loan balance 3. Single lump sum payment 4. Interest plus fixed amount

2. Fixed payments that result in a zero loan balance 4. Interest plus fixed amount

Select all that apply Which of the following are annuities? 1. Tips to a waiter 2. Monthly rent payments in a lease 3. Monthly grocery bill 4. Installment loan payments

2. Monthly rent payments in a lease 4. Installment loan payments

Select all that apply Which of the following are real-world examples of annuities? 1. Common stock dividends 2. Pensions 3. Mortgages 4. Preferred stock dividends

2. Pensions 3. Mortgages Common stock dividends are not annuities because they are not necessarily constant and they do not have a finite stopping time. Preferred stock dividends are not annuities because they do not have a finite stopping time.

Suppose you are using a financial spreadsheet to calculate the present of value of a yearly $250 payment for 5 years with a discount rate of 6 percent. Which of the variables should be entered as a negative? 1. The discount rate 2. The $250 per year payment 3. The number of years

2. The $250 per year payment The $250 payment would be entered as a negative given that it represents outflow.

Select all that apply Interest earned only on your original investment is called _______, whereas interest earned on interest is called _______. 1. future value 2. compound interest 3. present value 4. simple interest

2. compound interest 4. simple interest Interest earned only on the original investment is simple interest; interest earned on interest is compounding.

Discounting is the process of converting ______ dollars into a ______ value. 1. future; zero 2. future; present 3. current; future 4. current; zero

2. future; present Discounting is the process of converting future dollars into a present value.

PV = C/(r - g) is the formula for the present value of a: 1. fixed perpetuity. 2. growing perpetuity. 3. British consol. 4. growing annuity.

2. growing perpetuity. PV = C/(r - g) is the formula for the present value of a growing perpetuity.

For a positive annual percentage rate (APR) and multiple (more than one) compounding periods per year, the EAR is always _______ the APR. 1. equal to 2. larger than 3. smaller than

2. larger than For a positive annual percentage rate (APR) and multiple (more than one) compounding periods per year, the EAR is always larger than the APR.

Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is _______. 1. the same 2. less 3. more

2. less

A traditional (non-growing) annuity consists of a(n) _______ stream of cash flows for a fixed period of time. 1. uneven 2. level 3. infinite 4. random

2. level A traditional (non-growing) annuity consists of a level stream of cash flows for a fixed period of time.