ch6 mgt3040

Beatrice has a credit card that applies interest every month to her account balance. In this case, Beatrice is paying an interest rate that:

Is greater than the APR shown on her billing statement.

A loan where the borrower receives money today and repays a single lump sum at some time in the future is called a(n) ___________ loan.

Pure discount.

Which of the following CANNOT be calculated?

The future value of a perpetuity.

Which one of the following is a correct definition?

An ordinary annuity is a stream of equal payments which occur at the end of each time period.

Which one of the following will increase the future value of a stream of unequal payments for a ten year project? The rate of return is positive

Moving more of the cash inflows to the earlier years of the project

If you are borrowing money, which one of the following rates would you prefer?

9% paid annual

A perpetuity differs from an annuity because:

Perpetuity payments never cease.

Which of the following fit the definition of a perpetuity? I. Preferred stock dividend. II. Common stock dividend. III. Endowment fund providing equal annual payments from accrued earnings. IV. Monthly payments equal to 100% of the income earned by a restaurant.

I and III only

You are comparing two annuities. Both annuities pay the same amount for the same number of months. The discount rate is also identical. If the ordinary annuity is worth $26,500, the annuity due is worth:

$26,500 × [1 + (r/12)].

Which one of the following would have the greatest present value, assuming a positive discount rate?

$2,200 today plus $200 a month for six months.

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded semi-annually. Which would you choose and why?

A because it has a higher effective annual rate

Which one of the following is true concerning amortized loans?

A loan where annual payments include the interest due plus some set amount of principal is an amortized loan.

You are trying to use your financial calculator to solve a present value problem that has unequal cash flows. You input monies you receive as positive values. Which one of the following statements is true?

A negative present value indicates that this series of cash flows causes you to lose money today given a certain discount rate.

Which of the following is NOT a true statement?

All else the same, the longer the term of a loan the lower will be the total interest you pay on it.

A loan where the borrower pays interest each period, and repays some or all of the principal of the loan over time is called a(n) _____ loan.

Amortized.

Each month that Jennifer pays a payment on her personal loan, the amount that is applied to the principal balance increases. Jennifer has a(n)_____ loan

Amortized.

The process of making regular payments that reduce the principal loan balance is called:

Amortizing the loan.

A perpetuity is a series of payments that:

Are equal in amount and continue forever.

Which one of the following is correct concerning the annual percentage rate (APR)?

The APR is the rate which lenders are required to disclose.

Which one of the following statements concerning the annual percentage rate is correct?

The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest

You are considering two loan offers. All else equal, you should accept the loan:

With the lowest effective annual rate.

The effective annual rate is equal to:

[1 + Quoted rate/m]^m-1.

The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as:

e^.09 - 1.

The present value factor for annuities is calculated as:

(1 - present value factor)/r

A loan where the borrower pays interest each period and repays the entire principal of the loan at some point in the future is called a(n) ___________ loan.

Interest-only

Which one of the following will increase the present value of an annuity?

Lowering the discount rate.

An amortized loan:

May have equal or increasing amounts applied to the principle from each loan

A pure discount loan is defined as a loan where a borrower receives money today in exchange for:

One lump sum payment at the end of the loan term.

Which one of the following statements concerning an ordinary annuity is true?

The future value of an ordinary annuity can be computed by dividing the future value of an annuity due by (1 + r).

A pure discount loan is one where the borrower receives money today and repays the loan with:

A single lump sum in the future.

The effective annual rate on your savings account assumes that:

All interest payments are reinvested at the same rate as the original deposit into the account

Which one of the following is correct concerning ordinary annuities and annuities due?

An annuity due will have a larger future value than an ordinary annuity given that the annuities are otherwise identical.

Which one of the following statements concerning interest rates is correct?

An effective annual rate is the rate that applies if interest were charged annually.

The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

Annual percentage.

You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

Annuity A has a higher future value than annuity B.

If you are investing money, you should prefer an ______ and if you are borrowing money you should prefer an _____.

Annuity due; ordinary annuity

The maximum rate which a bank can earn given a stated annual percentage rate is the rate which is computed using

Continuous compounding.

In order to compare different investment opportunities (each with the same risk) with interest rates reported in different manners you should:

Convert each interest rate to an effective annual rate.

To compare interest rates offered by various financial institutions, you should compare the:

Effective annual rates.

The interest rate expressed as if it were compounded once per year is called the _____ rate

Effective annual.

You are planning to save your Christmas bonuses from work and are comparing savings accounts: Account A compounds semi-annually while account B compounds monthly. If both accounts have the same effective annual rate of interest and you place only the bonuses in the account, you should choose ___________.

Either since you would be indifferent between the two.

An annuity due is a series of:

Equal payments that occur at the beginning of each time period for a set period of time.

A pure discount loan is a(n):

Example of a present value problem.

Which of the following is (are) correct concerning interest-only loans? I. Most corporate bonds are examples of interest-only loans. II. The amount of principal due at the end of the loan term is equal to the amount borrowed. III. Each payment amortizes a portion of the loan principal. IV. The amount borrowed is the present value of the amount due at maturity given a stated discount rate.

I and II only

Which of the following will increase the effective annual rate? I. Increasing the frequency of the compounding. II. Decreasing the frequency of the compounding. III. Increasing the stated rate. IV. Decreasing the annual percentage rate.

I and III only

Which of the following is (are) correct concerning perpetuities? I. Perpetuities consist of a stream of equal payments. II. Perpetuities have a life of between twenty and one hundred years. III. Perpetuities have a variable rate of return. IV. The present value perpetuity formula for a stream of annual payments is: C/(1 + r/12)^12.

I only

Donavan borrowed $10,000 for three years at 10 percent annual interest. The payment he owes for the second year of the loan is $1,000. Donavan has a(n) _____ loan.

Interest-only.

The formula {C}{[1 - (1/(1 + r)t )]/r} is the _______ formula.

Present value of an annuity.

Given a fixed stream of monthly income the:

Present value will increase as the time period increases.

The principle amount of an interest-only loan is:

Repaid in full at the end of the loan period.

The interest rate which lenders must report to borrowers as required by law is the:

Annual percentage rate.

When interest is credited the instant it is earned it is referred to as:

Continuously compounded interest.

An annuity stream where the payments occur forever is called a(n):

Perpetuity

Tomas wants to save $1,200 a year in a manner that maximizes his savings. To do this, he should:

Treat his $100 monthly savings deposits as an annuity due.

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded monthly. Which would you choose and why?

B because it has a higher effective annual rate.

You are considering two perpetuities which are identical in every way, except that perpetuity A will begin making annual payments of $P to you two years from today while the first $P payment for perpetuity B will occur one year from today. It must be true that the present value of perpetuity

B exceeds that of A by the PV of $P for one year.

A loan where the borrower pays interest each period, repays part of the principal of the loan over time, and repays the remainder of the principal at the end of the loan, is called a(n) _____________ loan

Balloon.

Which of the following statements concerning the effective annual rate are correct? I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates. II. The more frequently interest is compounded, the higher the effective annual rate. III. A quoted rate of 6 percent compounded continuously has a higher effective annual rate than if the rate were compounded daily. IV. When choosing which loan to accept, you should select the offer with the highest effective annual rate

I, II, and III only

Which of the following fit the definition of an annuity? I. $100 a quarter for 10 years II. $200 a year forever III. $10 a week for 1,000 weeks IV $150 a month for 72 months

I, III, and IV only

Which of the following statements is (are) true concerning a timeline? I. A timeline is a visual drawing depicting cash flows. II. As you move leftward on a timeline, you move further into the future. III. Time 0 generally represents today. IV. A timeline with no future ending point is a perpetuity.

I, III, and IV only

You are going to invest $500 at the end of each year for 10 years. Given an interest rate, you can find the future value of this investment by: I. Adding the cash flows together and finding the future value of the sum using the appropriate future value factor. II. Applying the proper future value factor to each cash flow, then adding up these future values. III. Finding the present value of each cash flow, adding all of the present values together, then finding the future value at the end of year 10 of this lump sum. IV. Finding the present value of the entire payment stream

II and III only

Which of the following comparison statements is (are) true? I. An annuity has equal payments, a perpetuity does not. II. Both an annuity and a perpetuity have equal payments. III. An annuity covers a longer period of time than a perpetuity. IV. An annuity has a constant rate of return, a perpetuity does not.

II only

Which of the following statements are true concerning these two projects? I. Both projects have the same future value at the end of year 4, given a positive rate of return. II. Both projects have the same future value given a zero rate of return. III. Both projects have the same future value at any point in time, given a positive rate of return. IV. Project A has a higher future value than project B, given a positive rate of return. You are considering two projects with the following cash flows:

II only

Which one of the following terms would best describe the type of compounding that occurs when interest is compounded continuously?

Instantaneous.

An annuity stream of cash flow payments is a set of:

Level cash flows occurring each time period for a fixed length of time.

The difference between an annuity and a perpetuity is the:

Number of time periods

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

Option A is the better choice of the two given any positive rate of return.

Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.

Ordinary annuities; annuities due

You just purchased some furniture from the LB Home Store. The store sold you the furniture under the agreement that you will pay $248 a month for 36 months starting one month from today. Your loan can be described as a(n):

Ordinary annuity.

The interest rate expressed in terms of the interest payment made each period is called the _____ rate

Stated interest.

In the annuity present value formula, the variable "r" must be expressed as a(n):

Stated rate per period of time t.

Your banker quotes you two different loan payments on a $12,000 car loan, one calling for 36 monthly payments and the other calling for 24 monthly payments. Both loans have the same APR and EAR. She then tells you that the shorter loan is a better deal because the total payments you would make over the life of the loan would be lower. What is she ignoring?

The interest you could earn by saving the difference between the two loan payments.

Suppose you are evaluating two annuities. They are identical in every way, except that one is an ordinary annuity and one is an annuity due. Assuming an interest rate of 10%, which of the following is true?

The regular annuity must have a lower future value than the annuity due.

Which of the following is a true statement?

When comparing investments it is best not to rely solely on quoted rates.

The effective annual rate is defined as the rate which:

Would apply if interest were compounded annually.

The effective annual rate with continuous compounding is expressed as EAR=:

e^q - 1.