FIN 331 Exam 2: Chapter 6

Which payment methods amortizes a loan?

1: Interest plus fixed amount 2: Fixed payments that result in zero loan balance

Your bank quotes a 9% APR on your car loan (.75 percent interest each month). What is the EAR?

9.38%

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

compounding

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

effective

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

level

A single cash flow is also known as a:

lump sum

Most investments involve:

multiple cash flows

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

principal

The original loan amount is called the:

principal

With interest-only loans that are not perpetuities, the entire principal is:

repaid at some point in the future

Interest paid twice a year is known as _____ compounding.

semi-annual

An effective annual rate of 7.12 percent is equal to 7 percent compounded _____.

semiannually

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

tradition; legislation

Which of the following is equal to an effective annual rate of 12.36 percent?

12%, compounded semiannually

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

1: Compound the accumulated balance forward one year at a time 2: Calculate the future value of each cash flow first and then add them up

How can you amortize a loan?

1: Pay the interest each period plus some fixed amount of the principal 2: Pay principal and interest every period in a fixed payment

APR

The interest rate per period multiplied by the number of periods in the year

EAR

The interest rate stated at though it were compounded once per year

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

interest plus a fixed principal amount every period

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