Chapter 5

Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?

(1+quoted rate/m)m - 1

The formula for the present value of an annuity due is:

(1+r)×(PV of an ordinary annuity)

Which of the following processes can be used to calculate the future value of multiple cash flows?

- calculate the future value of each cash flow first and then sum them - compound the accumulated balance forward for one year at a time

Which of the following spreadsheet functions will result in the correct answer for the following annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8%. How much will you have in this annuity?

=FV(.08,10,-100,0)

Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?

=PV(0.10,10,-100,0,0)

Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?

EFFECT(0.12,4)

When calculating annuity present values using a financial calculator, the ______________ amount is left blank.

FV

More frequent compounding leads to:

Higher EARs

You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the _____ value on the financial calculator.

N

Which of the following are ways to amortize a loan?

Pay principal and interest every period in a fixed payment. and Pay the interest each period plus some fixed amount of the principal.

Which of the following is the simplest form of loan?

a pure discount loan

The interest rate charged per period multiplied by the number of periods per year is equal to __________ ____________ ____________ on a loan.

annual percentage rate

An annuity with payments beginning immediately rather than at the end of the period is called an _________.

annuity due

An annuity due is a series of payments that are made ____.

at the beginning of each period

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.

compounding

One step in calculating an EAR is to ____________ the quoted rate by the number of times that the interest is compounded.

divide

the __________ annual rate is the interest rate expressed as if it were compounded once per year.

effective

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the _______ of the period.

end

True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.

false

True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.

false

True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

false

Which of the following is not a way to amortize a loan?

fixed interest payment only

If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.

greater than

A perpetuity is a constant stream of cash flows for a(n) ______ period of time.

infinite

When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage.

interest rate

Which of the following are real-world examples of annuities?

leases, mortgages and pensions

An ordinary annuity consists of a(n) ________ stream of cash flows for a fixed period of time.

level

A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with ____________ -term business loans.

medium

The annuity present value factor equals one ____________ the present value factor all divided by the discount rate.

minus

Which of the following could not be evaluated as annuities or annuities due?

monthly electric bills and tips to a waiter

When using a financial calculator to find the number of payments, the PMT value should be entered as a _____________

negative

The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1+ r).

ordinary

The entire principal of an interest-only loan is the:

original loan amount

The _____________ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

payment

C/r is the formula for the present value of a(n) ____.

perpetuity

The original amount of a loan is termed the loan ___________.

principal

If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a _______________ .

pure discount loan

Compounding during the year can lead to a difference between the _______ rate and the effective rate.

quoted

Compounding during the year can lead to a difference between the ______________ rate and the effective rate.

quoted

EAR = (1 +__________rate/m)^m -1

quoted

With typical interest-only loans, the entire principal is:

repaid at some point in the future

True or false: Interest rates can be quoted in various ways.

true

True or false: The annuity present value of an amount C is calculated as C multiplied by

true

True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.

true

Which of the following is a perpetuity?

A constant stream of cash flows forever

The most common way to repay a loan is to pay ____.

a single fixed payment every period

One step in calculating an EAR is to _______________ the quoted rate by the number of times that the interest is compounded.

divide

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.

false

True or false: The interest rate charged per period divided by the number of periods per year.

false

When entering variables in a spreadsheet function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?

payment, future value, and present value

The ___________ present value can be found using the perpetual cash flow and the discount rate.

perpetuity

Because of __________ and _________, interest rates are often quoted in many different ways.

tradition; legislation

The formula for the future value of an annuity factor is [(1+r)t -1]/r.

true

True or false: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.

true

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

true

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 third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.

uneven

The cash flows of an annuity due are the same as those of an ordinary annuity except that there is an extra cash flow at Time _______

zero

True or false: With interest-only loans, the principle is never repaid.

false

When finding the present or future value of an annuity using a spreadsheet, the ______ ______ should be entered as a decimal.

interest rate

Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the _______ value.

nper

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

perpetuity

The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)^τ]/r.

present

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.

end

True or false: To find the annuity future value factor, you only need the cash flows and the discount rate.

false

True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).

false

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

principal

The general formula for ______ is (1+quoted rate/m)m - 1.

the EAR

To find the present value of an annuity of $100 per year for 10 years at 10% per year using the tables, find a present value factor of 6.1446 and multiply it by ______.

100

In the Excel setup of a loan amortization problem, which of the following occurs?

The payment is found with = PMT(rate, nper, -pv, fv). and To find the principal payment each month, you subtract the dollar interest payment from the fixed payment.

True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

true