EXAM 2 Finance

CH. 4 quiz: Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:

Discounting

FV = __________ ×(1 + r)t

PV

Using the PV, discount rate, and ________ you can determine the number of periods.

fv

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

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

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

repaid at some point in the future

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

the EAR

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

tradition; legislation

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

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

(1+r)

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 one year at a time

Which of the following are ways to amortize a loan?

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

For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)

-the recipricol of -1 divided by

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

1.21

Which one of the following has the highest effective annual rate?

6 percent compounded daily

Which of the following is a perpetuity?

A constant stream of cash flows forever

Which statement is true?

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

Which one of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments

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

Tips to a waiter Monthly electric bills

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

CH 4 Quiz: South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

will be greater if you invest with Northern Bank.

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

FV

Which of the following is the multi-period formula for compounding a present value into a future value?

FV = PV×(1 + r)t

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

False

True or false: The present value is the sum of all expenses in a project.

False

Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.

discounted cash flow (DCF)

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

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

effective

True or false: Future value refers to the amount of money an investment is worth today.

false

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

false

CH 4: The present value of a lump-sum future amount:

increases as the interest rate decreases.

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?

interest-only

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

payment

CH 4 quiz: Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?

Increasing the interest rate

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

minus

Which one of the following qualifies as an annuity payment?

monthly car payments

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

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

perpetuity

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

perpetuity

The current value of a future cash flow discounted at the appropriate rate is called the _____ value.

present

With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.

present; future

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

Mortgages Leases Pensions

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

If FV= PV x (1+r) is the single period formula for future value, which of the following is the single period present value formula?

PV = FV/(1+r)

Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r per cent interest?

PV = FV/(1+r)t

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

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

a single fixed payment every period

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 due is a series of payments that are made ____.

at the beginning of each period

Future value is the ________ value of an investment at some time in the future.

cash

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

compounding

The process of accumulating interest in an investment over time to earn more interest is called _________.

compounding

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

Greater than

More frequent compounding leads to:

Higher EARs

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 payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.

False

True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

False

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

False

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

False

Which of the following are the primary as well as easy ways used to perform financial calculations today?

Financial calculator Spreadsheet functions

Which one of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options.

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.

True

True or false: The formula for a present value factor is 1/(1+r)t11+rt.

True

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

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

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: If you invest for two periods at an interest rate of r, then your money will grow th (1 + r) per dollar invested.

false

The amount an investment is worth after one or more periods is called the _____ value.

future

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

level

Given an investment amount and a set rate of interest, the _____ the time horizon the _____ the future value.

longer; greater

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 loan

medium