Chapter 6

What are two ways to calculate a balloon payment?

-Amortize the loan over the loan life to find the ending balance -Find the present value of the payments remaining after the loan term

In terms of time of maturity, US Treasury notes and bonds have initial maturities ranging from ___ years.

2:30

Which of the following is a perpetuity

A constant stream of cash flows forever

Which one of the following terms is used to describe a loan wherein each payments is equal in amount and includes both interest and principal

Amortized loan

The name for perpetuity in Canada and the United Kingdom is a

Consol

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward ______ at a time

One year

The loans are short-term loans made to customers which require you to write a check today that is postdated

Payday

The _____rate is used to find the EAR

Quoted

The APR is also called the ______ rate and it differs from the EAR

Stated

Which one of these statements related to growing annuities and perpetuities is correct

The present value of a growing perpetuity will decrease if the discount rate is increased.

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?

effective annual rate

How frequently does continuous compounding occur

every instant

growing annuity has

finite number of growing cash flows

A single cash flow is also known as a:

lump sum

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

perpetuity

Which of the following are real-world examples of annuities

preferred stock dividends, mortgages, pensions and leases

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

pure discount

The entire repayment of which one of the following loans is computed simply by computing a single future value

pure discount loan

Which of the following is the simplest form of loan

pure discount loan

The interest rate that is quoted by a lender is referred to as which one of the following?

stated interest rate

Another common name for the effective annual rate is the annual percentage ______

yield

What is the interest rate charged per period multiplied by the number of periods per year called?

Annual Percentage Rate

A lump sum payment to pay off the balance of a partially amortized loan is called a _____ payment

balloon or bullet

When calculating the future value of multiple cash flows using a spreadsheet, you must:

calculate the future value of each cash flow then add the compounded values together

Most investments involve:

multiple cash flows

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

Calculate the future value of each cash flow first and then add them up. Compound the accumulated balance forward one year at a time.

How is the principal amount of an interest-only loan repaid?

The principal is repaid in a lump sum at the end of the loan period.

An amortized loan:

may have equal or increasing amounts applied to the principal from each loan payment.

Which one of the following statements correctly states a relationship -time and future values are inversely related, all else held constant Time and present value are inversely related, all else held constant

Time and present value are inversely related, all else held constant

A traditional (non-growing) annuity consists of a _____ stream of cash flows for a fixed period of time

level

Which of the following should be valued using a perpetuity formula ?

-preferred stock -cash flows from a product whose sales are expected to remain constant forever -a consol (bond that pays interest only and does not mature)

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

At the beginning of each period.

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be lauds in one lump sum

Balloon loan

Which one of the following compounding g periods will yield the smallest present value given a stated future value and annual percentage rate

Continuous

The present value of an annuity is equal to the present value of an _______ Annuity multiplied by (1+r)

Ordinary

A typical investment has a large cash _______ (inflow/outflow) at the beginning and then a cash _________

Outflow ; inflow

When the U.S. government wants to borrow money for the long-term (more than one year) it issues

Treasury notes and treasury bonds

Because of tradition and legislation interest rates are often quoted in many different ways

True

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

Zero

Which compounding interval will result in the lowest future value assuming everything else is held constant?

annual

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

compounding

The future value of $100 at 10 percent compounded semiannually is _______ the future value of $100 at 10 percent compounded annually

greater than

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment

interest-only loan

For a positive stated annual interest rate and multiple compounding periods per year, the EAR is always _____ the APR.

larger than

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

end

When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.

lump