BUSI320 Chapter 9

An amortization schedule includes:

year. principal paid. opening balance. interest paid. closing balance. total payment.

Which of the following is an input used in the Present Value (PV) function for Microsoft Excel?

All of the listed answers

The future value of an amount is directly proportional to the interest rates.

True Reason: A lower interest rate always corresponds with a lower future value, regardless of the number of periods.

Present value tables provide conversion factors to convert Blank______.

future values to present values

A decrease in the interest rate Blank______ the present value of a single sum to be received in the future

increases

Compound interest can be described as:

interest earned on principal and on accrued interest

The financial calculator does not require us to use the function.

log

The Blank______ the annuity payment "PMT", the Blank______ the present value of the annuity.

lower; lower higher; higher

Many investments require a series of _____ which makes understanding the present value of a(n) _____ important.

payments Blank 2: annuity

Which of these are used to calculate the present value of multiple cash flows in Excel?

the PV function the NPV function

An annuity factor is _________.

the term used to compute the present value of the stream of payment

Your insurance agent wants to sell you an annuity consisting of 20 equal end of year payments of $10,000 each, starting at the end of this year. Your desired rate of return for investments of this type is 7 percent. What is the most you would pay for this annuity today?

$105,940.14 Reason: Correct. PV = 10,000[1/0.07 − 1/0.07(1.07)20] = 105,940.14.

The two variables that determine the interest factor in a TVM table are the number of periods and the future value.

False Reason: The two variables in a TVM table are the number of periods and the interest rate

A cash flow that provides only one payment could be considered an annuity.

False reason: An annuity must have at least two payments that have equal amounts and equal spacing (time between payments).

To find the future value of a single amount, what table or procedure would you use?

Future value of $1

To find the future value of a series of equal payments, what table or procedure would you use?

Future value of an annuity

An increase in the number of periods will Blank______ the present value of a single sum.

decrease

Expressed in graphical form, the bars showing the present value will Blank______ if the number of periods increase.

decrease

An increase in the discount rate would Blank______ the present value of an annuity.

decrease Reason: The PV of an annuity is the amount an investor would pay today in order to receive the future payments at a given interest rate. Example: An annuity of $100 per year for three years would have a PV of $300 at I/Y=0%, but would have a PV of $272 at I/Y=5%.

As a rule, the future value of a single sum will be Blank______ its present value.

greater than

Which of the following are the correct number of periods (n) and interest rate (i) per period to use to calculate the present value of a 12% loan that requires quarterly payments of $1,000 over 5 years? (Check all that apply.)

i=3% n=20

A decrease in the discount rate would Blank______ the present value of an annuity.

increase

Expressed in graphical form, the line showing the future value will Blank______ if the number of periods increase.

increase

For an annuity, an increase in the number of periods will Blank______ the present value.

increase

If all other factors remain the same, an increase in the number of periods will Blank______ the future value of an investment.

increase

An increase in the interest rate will:

increase the future value decrease the present value

The future value of an annuity of $1,000 will be Blank______ the future value of a single sum of $1,000.

more than

When using the time value tables, the interest factor that is looked up (i.e., PVIF, PFIVA, FVIF, FVIFA) is then Blank______ the dollar amount of the known variable (PV, PMT, or FV).

multiplied by

The present value of an annuity is the value Blank______.

now of a series of equal amounts to be received or paid in the future

Amortization is the Blank______.

process of paying off an installment loan in a series of equal payments consisting of both principal and interest

Present value refers to

the amount that must be invested today to realize a specific amount in the future.

For an annuity due,

the beginning of the annuity coincides with the first payment in the annuity.

In solving a general annuity problem, the interest rate that should be used is

the equivalent periodic rate per payment period.

The present value of a 12% annuity requiring quarterly payments of $1,000 over 2 years, rounded to the nearest $1, equals Blank______.

$7,020 Reason: $7,020=$1,000 x 7.0197; payments are quarterly thus, the number of periods is 8 and the interest 3%.

What is compound interest?

Interest which is calculated on the initial deposit plus the accumulated interest of prior periods.

Which formula represents a present value factor?

1 / (1 + r)t

Assuming an interest rate of 12% with quarterly compounding, what is the interest rate per compounding period?

3%

If you invest $5,000 in a savings account with quarterly compounding at 16%, what is the interest rate per compounding period?

4%

The present value formula is:

FV/(1+i)n

The basic present value equation is Blank______.

PV = FVt/(1 + r)t

To find the present value of a single sum, what table or procedure would you use?

Present value of $1

The n value in present and future value tables refers to what?

The total number of compounding periods.

An annuity is defined as

a series of equal payments at regular intervals.

What factors must be known in order to calculate the current value of an annuity?

amount of each annuity payment interest rate number of periods

An ordinary annuity is defined as

an annuity in which the payments are made at the end of each payment interval.

An annuity due is defined as

an annuity in which the periodic payments occur at the beginning of each payment interval.

An annuity which is to be paid Blank______ is known as a deferred annuity.

at some time in the future

Present value tables provide

conversion factors to convert future values to present values.

You would like to invest $200,000 of retirement savings into an annuity that will pay you equal payments at the beginning of every month for 20 years. To find out how much those monthly payments will be, which of the following would be the correct formula to choose before rearranging for PMT?

PV(due) = PMT[1−(1+i)−ni]1-(1+�)-�� ×(1+i)

To find the present value of a series of equal payments, what table or procedure would you use?

Present value of an annuity

To calculate the discount rate in a present value problem in Excel, the formula used is Blank______(nper,pmt,pv,fv)

RATE

For which of the following would time value of money be a factor when considering an investment in or sale of an asset?

Sale of an asset on an installment contract Purchase of an asset on an installment contract Purchase of an annuity

True or false: For a simple annuity, the value of n means the total number of payments which coincides with the total number of compounding periods.

True Reason: For a simple annuity, the payment interval and the compounding frequency match. Therefore, the the total number of payments coincides with the total number of compounding periods.

True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity using the PMT key.

True Reason: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity using the PMT key.

True or false: Working out the implied interest rate on an annuity allows you to compare whether the annuity is a good investment.

True Reason: Working out the implied interest rate on an annuity allows you to compare whether the annuity is value for money.

If Anita wishes to accumulate $11,734 after five years at an 8 percent interest rate, how much must should Anita set aside at the end of each of the five periods? The following table shows future value of annuity of $1:

$2,000

Review the following statements and select the one which is true regarding an ordinary annuity.

An ordinary annuity is a series of equal payments occurring at the end of the period at equal intervals.

Joe is offered 5% simple interest at Bank A and 5% annual compound interest at Bank B. At the end of one year

Both banks would pay the same Reason: In this situation, since the period is only one year, Bank B does not provide any additional compounding advantage over Bank A. However, had the number of periods been greater than one, Bank B would provide additional interest.

An increase in the number of periods will Blank______ the present value of a single sum to be received in the future.

decrease Reason: The PV represents that amount one would have to pay today to receive the lump sum in the future. If the number of periods (N) is higher then the initial investment (PV) required will be lower because it will earn more interest over the longer period time.

To calculate the present value of an annuity

each individual payment is discounted back to the present and then all of the discounted payments are added up.