FINC311 CH5 Questions
infinite
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
medium
A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with________ -term business loans.
Principal
Amortization is the process of paying off loans by regularly reducing the _________.
at the beginning of each period
An annuity due is a series of payments that are made ____.
annuity due
An annuity with payments beginning immediately rather than at the end of the period is called an _________.
effective
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
tradition; legislation
Because of __________ and _________, interest rates are often quoted in many different ways.
perpetuity
C/r is the formula for the present value of a(n) ____.
quoted
Compounding during the year can lead to a difference between the _______ rate and the effective rate.
greater than
If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.
Higher EARs
More frequent compounding leads to:
divide
One step in calculating an EAR is to _________ the quoted rate by the number of times that the interest is compounded.
end
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.
effective
The _______ annual rate is the interest rate expressed as if it were compounded once per year.
perpetuity
The _______ present value can be found using the perpetual cash flow and the discount rate.
compounding
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
original loan amount
The entire principal of an interest-only loan is the:
the EAR
The general formula for ______ is (1+quoted rate/m)m - 1.
annual percentage rate
The interest rate charged per period multiplied by the number of periods per year is ______ _______ ______ on a loan.
a single fixed payment every period
The most common way to repay a loan is to pay ____.
principal
The original amount of a loan is termed the loan ___________.
perpetuity
The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
True
True or false: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.
[(1+r)^t-1]/r
Which of the following is the formula for the future value of an annuity factor?
(1+quoted rate/m)^m -1
Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?
A pure discount loan
Which of the following is the simplest form of loan?
quote
EAR = (1 + _________ rate/m)m - 1
pure discount loan
If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a _______________.
payment
The ____________ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
minus
The annuity present value factor equals one _________ the present value factor all divided by the discount rate.
zero
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 __________.
annual percentage rate
The interest rate charged per period multiplied by the number of periods per year is equal to _______ _________ ______ on a loan.
ordinary
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1+ r).
$100
To find the present value of an annuity of $100 per year for 10 years at 10% per year using the tables, find a present value factor of 6.1446 and multiply it by ______.
-Pensions -Mortgages -Leases
Which of the following are real-world examples of annuities?
-Pay the interest each period plus some fixed amount of the principal; -pay principal and interest every period in a fixed payment
Which of the following are ways to amortize a loan?
A constant stream of cash flows forever
Which of the following is a perpetuity?
The payment is found using PMT (rate, -pv, fv); -To find the principal payment each month, you subtract the interest payment from the fixed payment
In the Excel setup of a loan amortization problem, which of the following occurs?
True
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
interest rate
When finding the present or future value of an annuity using a spreadsheet, the ______ ______ should be entered as a decimal.
uneven
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.
Present
The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)τ]/r.
true
The formula for the future value of an annuity factor is [(1+r)t -1]/r.
(1+r)×(PV of an ordinary annuity)
The formula for the present value of an annuity due is:
False
True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.
True
True or false: Interest rates can be quoted in various ways.
False
True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.
False
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
true
True or false: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)t]}/r
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: The interest rate charged per period divided by the number of periods per year.
false
True or false: The interest rate charged per period 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.
True
True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.
False
True or false: To find the annuity future value factor, you only need the cash flows 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.
false
True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).
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.
False
True or false: When using a financial calculator to find the number of payments, the PMT value should be entered as a positive.
Fasle
True or false: When using a financial calculator to find the number of payments, the PMT value should be entered as a positive.
False
True or false: With interest-only loans, the principle is never repaid.
nper
Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the ______ value.
FV
When calculating annuity present values using a financial calculator, the _______ amount is left blank.
-payment -present value -future value
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?
interest rate
When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage.
negative
When using a financial calculator to find the number of payments, the PMT value should be entered as a ______ .
-tips to a waiter -monthly electric bills
Which of the following could not be evaluated as annuities or annuities due?
fixed interest payments only
Which of the following is not a way to amortize a loan?
EFFECT(0.12,4)
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?
-calculate the future value of each cash flow first and then add them up -compound the accumulated balance forward one year at a time
Which of the following processes can be used to calculate the future value of multiple cash flows?
=PV(0.10,10,-100,0,0)
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?
=FV(.08,10,-100,0)
Which of the following spreadsheet functions will result in the correct answer for the following annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8%. How much will you have in this annuity?
repaid at some point in the future
With typical interest-only loans, the entire principal is:
N
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.
