Intro to Finance Mod 4
$100 at the end of each year forever at 10% per year is worth how much today?
$1000
A 5 year $10,000 loan with a 15 year amortization period paid monthly at 10% compounded monthly will have monthly payments of ----
$107.46
What is the present value of an ordinary annuity that pays $100 per year for 3 years if the interest rate is 10% per year?
$248.69
An APR of 9% with continuous compounding gives an EAR of
9.42%
The annuity present value factor for a 30 year annuity with an interest rate of 10% per year is ----
9.4269
Another common term for the effective annual rate (EAR) is the____
APY
annuity
a level stream of cash flows for a fixed period of time
What is the simplest form of loan?
a pure discount loan
consol
a type of perpetuity
perpetuity
an annuity in which the cash flows continue forever
An annuity due is a series of payments that are made ____
at the beginning of each period
Payday loans allow you to ---
borrow now and repay later
Assume interest is compounded monthly. The _______ annual rate will express this rate as though it were compounded annually.
effective
If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.
greater than
The future value of $100 at 10% compounded semiannually is _____ the future value of $100 at 10% compounded annually.
greater than
Given the same APR, more frequent compounding results in ----
higher EARs
For a positive stated annual interest rate and multiple (more than once) compounding periods per year, the EAR is always ____ the APR.
larger than
Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is -----
less
A traditional (no-growing) annuity consists of a _____ stream of cash flow for a fixed period of time.
level
A single cash flow is also known as a
lump sum
Most investments involve ----
multiple cash flows
What are 2 ways to amortize a loan?
pay principle and interest every period in a fixed payment; pay the interest each period plus some fixed amounts of the principle
When using the spreadsheet (Excel) function for finding PV of an annuity. Its a good idea to enter the ___ as a negative value.
payment
When using the spreadsheet (Excel) function for finding the PV of an annuity, its a good idea to enter the _____ as a negative value
payment
The loan balance on partial amortization loans declines so slowly because the ______
payments are mostly interest
C/r is the formula for the present value of a _____
perpetuity
Amortization is the process of paying off loans by regularly reducing the ____
principle
effective annual rate (EAR)
the interest rate expressed as if it were compounded once per year
Semi-annual compounding means that interest is paid _____ per year
two times
What is the present value of $100 for 20 years at 10% per year?
$851.36
You are planning to invest $1352 in a certificate of deposit for 2 years. You will receive $1500 at the end of 2 years. Find the interest rate you will receive on this investment, assuming annual compounding.
5.33%
In the Excel setup of a loan amortization problem, what occurs?
To find the principal payment each month, you subtract the interest payment for the total payment; the payment is found using PMT (rate, nper, -pv, fv)
annuity due
an annuity of which the cash flows occur at the beginning of the period
Which compounding interval will result in the lowest future value assuming everything else is held constant?
annual
A lump sum payment to pay off the balance of a partially amortized loan is called a _____ payment
balloon or bullet
the effective annual rate (EAR) takes into account the ____ of interest that occurs within a year.
compounding
Which type of amortization is most commonly used in the real world for mortgages and car loans?
fixed payments
What payment methods amortize a loan?
fixed payments that results in a zero loan balance; interest plus fixed amount
The present value formula for a ______ is PV=C/r where C is the constant and regularly times cash flow to infinity and r is the interest rate.
perpetuity
The present value formula for a _______ is PV= C/r, where C is the constant and regularly times cash flow to infinity and r is the interest rate.
perpetuity
The original loan amount is called_____
principle
With interest-only loans that are not perprtuities, the entire principal is---
repaid at some point in the future
What is true about a growing annuity?
the cash flows grow for a finite period; the cash flows grow at a constant rate
What is true about the amortization of a fixed payment loan?
the principal amount paid increases each period; the amount of interest paid decreases each period
Amy took out a $100k mortgage at an interest rate of 4.5% with monthly payments for 30 years. Her payment toward principal and interest is $506.69 per month. In the first month, how much principal will she repay?
$131.69
Use the financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%?
$1537.25
You have decided to fund an account that will pay your descendants the inflation-adjusted equivalent of $100 per year forever. You assume inflation will equal 3% per year, and you expect the account to earn 7% per year. How much do you need to put in the account today to ensure your gift will continue forever?
$2500.00
Ralph has $1000 in an account that pays 10% per year. Ralph wants to give this money to his favorite charity by making 3 equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?
$402.11
Use the financial calculate to find the value of an annuity of $400 per year for 10 years at 5%
$5031.16
Amy took out a mortgage of $100,000 at 4.5% with monthly payments for 30 years. What is her payment to principal and interest at the end of each month?
$506.69
The difference between the present value of an ordinary annuity with payments of $100 per year at 10% compounded for 10 years and an annuity due with payments $100 per year at 10% compounded annually for 10 years is----
$61.45
If the state interest rate is 10% , what is the EAR if interest is compounded monthly?
10.47%
You agree to repay $1200 in 2 weeks for $1000 payday loan. What is you EAR assuming that there are 52 weeks in a year?
11347.55%
A credit card charges 10% interest per year (APR) (1.5% each month). What is the EAR?
19.56%
You owe $1200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, how many months will it take to pay off your credit card? (use financial calculator)
30 months
What are 2 ways to calculate a balloon payment?
Amortize the loan over the loan life to find the ending balance; find the present value of the payments remaining after the loan term
What are 2 ways to to calculate the future value for multiple cash flows?
calculate the future value of each cash flow first then add them up; compound the accumulated balance forward 1 year at a time
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
What should be valued using a perpetuity formula?
cash flows from a product whose sales expected to remain constant forever; preferred stock; a consol (bond that pays interest only and does not mature)
One example of a perpetuity is a British ----
consol
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period
end
An effective annual rate of 7.12% is equal to 7% compounded _____
semi-annually
What are true about a partial amortization loan?
the borrower makes a large balloon payment at the end of the loan period; the amortization period is longer than the loan period
annual percentage rate (APR)
the interest rate charged per period multiplied by the number of periods per year
stated interest rate
the interest rate expressed in terms of the interest payment made each period (quoted interest rate)
Because of _____ and _____. interest rates are often quoted in many different ways.
tradition;legislation
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 3rd cash flow at the end of year 3 is $100. This cash flow patter is a ____ type of cash flow.
uneven
The formula for a present value of an annuity due is ------
(1+r) X (PV of an ordinary annuity)
Supposed you paid a $1200 loan off by paying $400 in principal each year plus 10% annual interest. How much is the interest payment in the second year of the loan?
$80.00 ($1200 - 400)=800 $800 x 0.1 = $80
You agree to repay $1200 in 2 weeks for a $1000 payday loan. What is your EAR assuming that there are 52 weeks in a year?
11347.55%
You agree to pay back $1100 in 4 weeks for a $1000 payday loan. You annual percentage rate rounded to 2 decimal places is ______%. (52 weeks in a year)
130.00 (1100/1000-1)X52/4=130%
If the interest rate is 10% per week, what is the EAR? Assume 52 weeks in a year.
14104% 1.10 (52) -1
You take a $1000 loan for 5 days and repay $1050 at the end of 5 days. What is the EAR of the loan?
3422.24%
To find the present value of an annuity of $100 per year for 10 years at 10% per years using the tables, look up the present value interest factor which is _____ and multiply that by _________
6.1446; $100
