Ch. 9
select all of the following variables you would not enter into your financial calculator to calculate the future value five years from today of $2500 deposited today
-future value (FV) -inflation rate (I) -payments (PMT)
select all of the following that are variables used in your financial calculator for time value of money calculations for a single lump sum of money
-present value (PV) -future value (FV) -interest rate (I/Y) -number of periods (N)
select all of the following that are variables used in your financial calculator for time value of money calculations for an annuity
-present value (PV) -future value (FV) -interest rate (I/Y) -number of periods (N) -payments (PMT) -begin/end mode (BGN/END)
a loan that is repaid in equal payments over a specified time period is called an
amortized loan
a loan that is repaid in equal payments over a specified time period is referred to as an
amortized loan
a series of equal payments or receipts that occur at the beginning of each of a number of time periods is referred to as
an annuity due
the interest rate determined by multiplying the interest rate charged per period by the number of periods in a year is called the
annual percentage rate
the method of calculating interest on a loan that is set by law is called the
annual percentage rate (APR)
in future value or present value problems, unless stated otherwise, cash flows are assumed to be
at the end of a time period
when the amount earned on a deposit becomes part of the principal at the end of a period and can earn a return in future periods, this is called
compound interest
the interest rate that measures the true interest rate when compounding occurs more frequently than once a year is called the
effective annual rate
when compounding more than once a year, the true opportunity costs measure of the interest rate is indicated by the
effective annual rate
an annuity due may also be referred to as a deferred annuity
false
an ordinary annuity exists when the equal payments occur at the beginning of each time period
false
as the number of periods increases, present value increases
false
at very high interest rates the "rule of 72" will result in a small estimation error for the estimate of the time for an investment to double
false
because interest compounds, the annual percentage rate formula will overstate the true interest cost of a loan
false
for a given discount rate, an ordinary annuity and an annuity due have the same present value
false
if the interest rate is 0% for 10 years, then the present value will be less than the future value
false
level cash flow amounts that occur at the end of each period, starting at the end of the first period, are an annuity due
false
simple interest is interest earned on the investment's principal and subsequently-earned interest
false
the annual percentage rate (APR) overstates the true or effective interest cost
false
the annual percentage rate is the true opportunity cost measure of the interest rate
false
the effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year
false
the interest portion increases and the principal portion decreases over time under a typical loan amortization schedule
false
with compound interest, interest is earned only on the investment's principal
false
the future value of a dollar ___ as the interest rate increases and its future value ___ the farther in the future is the funds are to be received
increases; increases
which of the following terms best describes an annuity due
payment at beginning of year
the ___ value of a savings or investment is its amount or value at the current time
present
the time value concept/calculation used in amortizing a loan is
present value of an annuity
a famous athlete is awarded a contract that stipulates equal payments to be made at the end of each month over a period of five years. to determine the value of the contract today, you would need to use
present value of an ordinary annuity
interest earned only on an investment's principal or original amount is referred to as
simple interest
select all of the following statements that are not descriptive of an amortization schedule
the same dollar amount of interest is paid with each payment
a fixed-rate mortgage is an example of an annuity
true
a loan amortization schedule shows the breakdown of each payment between interest and principal, as well as the remaining balance after each payment
true
an annuity is a series of equal payments that occur over a number of time periods
true
as the interest rate increases, present value decresase
true
at a zero interest rate, the present value of $1 remains at $1 and is not affected by time
true
at very low interest rates, the "rule of 72" does not approximate the compounding process well
true
compound interest is interest earned on interest in addition to interest earned on the principal
true
compounding means that interest earned each year, plus the principal, will be reinvested at the stated rate
true
discounting is an arithmetic process whereby a future sum decreases at a compounding interest rate over time to reach a present value
true
for an amortized loan is repaid in equal payments over a specific time period
true
for the same annual percentage rate, more frequent compounding increases the future value of an investor's funds more quickly
true
if the compound inflation rate were greater than the compound interest rate, future purchasing power on our savings would fall
true
money has a time value so long as interest is earned by saving or investing money
true
the effective annual rate (EAR) is sometimes called the annual effective yield
true
the effective annual rate (EAR) is the true opportunity cost measure of the interest rate
true
the method of calculating the annual percentage rate (APR) is set by law
true
the rule of 72 is an estimate of how long it would take to double a sum of money at a given interest rate
true
when the annual interest rate stays the same, more frequent interest compounding helps savers earn more interest over the course of the year
true