Chapters 5 and 6

Kurt won a lottery and will receive $1000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following

present value

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.

Amortized loan with equal principal payments

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at year 5 and an annual percentage rate of 10 percent

Annual

You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Annuity B has a smaller present value than annuity A

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

Barb will earn more interest the second year then Andy

Which of these will increase the present value of an amount to be received sometime in the future

Decrease in the interest rate

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

Discount rate

An interest rate on a loan that is compounded monthly but expressed as an annual rate would be an example of which one of the following rates?

Effective annual rate

Amortized loans must have which one of these characteristics

Either equal or unequal principal payments over the lifetime of the loan

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now?

Increase

Which one of the following variables is the exponent in the present value formula

Number of time periods

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.

Option B has a higher present value at time zero

which one of the following statements is true about these two projects given a positive discount rate

Project X has bother a higher present value and a higher future value than project Y

Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming neither Sue nor Neal withdraw any money from their accounts prior to retiring?

Sue will have more money than Neal at age 60

a Canadian console is best categorized as

a perpetuity

Interest earned on both initial principal and interest reinvested from prior periods is called

compounded interest

the process of determining the present value of future cash flows in order to know their worth today is referred to as

discounted flow valuation

According to rule 72, you can do which one of the following

double your money in 5 years at 14.4 percent interest

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

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

Which one of the following statements concerning interest rates is correct

the effective annual rate equals the annual percentage rate when interest is compunded annually

What is the relationship between present value and future value interest factors

the factors are reciprocals of each other

how is the principal amount of an interest-only loan repaid

the principal is repaid in one lump sum at the end of the loan period

Which one of the following statements correctly defines a time value of money relationship

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

which one of the following accurately defines a perpetuity

unending equal payments paid at equal time intervals

Which one of the following statements related to loan interest rates is correct

when comparing loans you should compare the effective annual rates