FN340 Ch. 6
You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%?
$5,000/1.03
When the U.S. government wants to borrow money for the long-term (more than one year) it issues: A) Treasury stocks B) Treasury bills C) Treasury bonds D) Treasury notes
C and D
APR
The interest rate per period multiplied by the number of periods in the year.
Which shape does the term structure of interest rates usually have?
Upward sloping
The ________ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
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
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 almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
A growing annuity has a(n) ____.
finite number of growing cash flows
A humped term structure of interest rates indicates that interest rates are expected to _____ as the time to maturity increases.
increase and then decline
Most investments involve _____ cash flows. Multiple choice question.
multiple
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) for many years.
outflow; inflows
The loan balance on ________ amortization loans declines so slowly because the payments are mostly interest.
partial
The original loan amount is called the _____.
principal
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.
semiannually
When the term structure of interest rates is downward sloping, ____.
short-term rates are higher than long-term rates
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
Which of the following is equal to an effective annual rate of 12.36 percent? A) 12%, compounded annually B) 12%, compounded monthly C) 12%, compounded semiannually D) 12%, compounded quarterly
C
How frequently does continuous compounding occur?
Every instant
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? A) Compound the accumulated balance forward one year at a time B) Find the future value of a single lump sum amount C) Discount all of the cash flows back to Year 0 D) Calculate the future value of each cash flow first and then add them up
A and D
Which three of the following are common shapes for the term structure of interest rates? A) Humped B) Downward sloping C) V-shaped D) Upward sloping
A, B, and D
Which of the following is a perpetuity? A) A constant stream of cash flows for a fixed period B) A constant stream of cash flows forever C) An undulating stream of cash flows forever D) A growing stream of cash flows for a fixed period
B
Which of the following are real-world examples of annuities? A) Common stock dividends B) Pensions C) Mortgages
B and C
Which of the following are annuities? A) Tips to a waiter B) Installment loan payments C) Monthly grocery bill D) Monthly rent payments in a lease
B and D
Which of the following is true about a growing annuity? A) The cash flows grow at an irregular rate. B) The cash flows grow for an infinite period. C) The cash flows grow at a constant rate. D) The cash flows grow for a finite period.
C and D
Which of the following is the simplest form of loan? A) A partially amortized loan B) An amortized loan C) An interest only loan D) A pure discount loan
D
T/F There is only one way to quote interest rates.
False
Which compounding interval will result in the lowest future value assuming everything else is held constant?
annual
The ________ future value factor is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
An annuity due is a series of payments that are made ____.
at the beginning of each period
With interest-only loans that are not perpetuities, the entire principal is _____. Multiple choice question.
repaid at some point in the future
EAR
The interest rate stated as though it were compounded once per year.
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.
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