LearnSmart Chapter 4 Conceptual Questions

If you invest $1,000 and your NPV is $200, the PV of future CFs is _______.

$1,200 NPV = -cost of invement + PV of FCF $200 = -$1,000 + x x = $1,200

Suppose you paid off a $1,200 loan by paying $400 in principal each year + 10% annual interest over a 3 year period. What is the total payment (interest + principal) in Year 3?

$440.

Suppose you paid a $1,200 loan off by paying $400 in principal each year + 10% annual interest. How much is the interest payment in the 2nd year of the loan?

$80. You are repaying $400 p/year. Interest is computed on the principal outstanding for the year, which is $1,200-$400 = $800. $800 * 10% annual interest = $80.

Which is true about a partial amortization loan? 1) The amortization period is longer than the loan period 2) The borrower makes a large balloon payment @ end of loan period 3) Monthly payments do not fully pay off by end of loan period 4) Monthly payment is based on the loan period

1, 2, 3

Which would lower the PV of a future amount? 1) Higher interest rate 2) Longer period of time 3) Higher level of risk 4) Shorter time period

1, 2, 3

Which are examples of annuities? 1) Common stock dividends 2) Preferred stock dividends 3) Mortgages 4) Pensions

3 & 4

Which of the following payments amortizes a loan? A) Fixed payments that result in a zero loan balance B) Interest + fixed amount C) Fixed interest payments only D) Single lump sum payments

A & B

TVM Concepts:

A) A dollar today is worth more than a dollar tomorrow. B) A dollar tomorrow is worth less than a dollar today. Because a dollar today can be invested today to be valued at >$1 tomorrow.

Discounting is the process of converting ______ dollars into a _______ value.

future; present

If you increase the risk level of a project, the discount rate should ____ which will ____ the project's present value.

increase; decrease

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

partial

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

principal

Assume $10 is invested today will be worth $64 in 25 years. Which is the correct formula for computing interest rate on this investment?

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

An EAR of 7.12% is equal to 7% APR compounded _______.

semiannually Do 7.12 down(EFF%), guess & check down(P/YR), press down(NOM%) and see if it comes out as close to 7.00.

One of the most basic principles of finance is that rational individuals prefer to receive a dollar ______ than a dollar ______.

today; tomorrow FIN: Always want to receive as much money as soon as possible (to prevent losing money in case there are defaults, etc.)

Present value interest factor of an annuity formula:

{(1-[1/(1+r)^t])/r}