Finance 2000 Learnsmart Ch.5

How much is $100 at the end of each year forever at 10% interest worth today?

$1,000

Your insurance agent wants to sell you an annuity consisting of 20 equal end of year payments of $10,000 each, starting at the end of this year. Your desired rate of return for investments of this type is 7%. What is the most you would pay for this annuity today?

$105,940.14 PV= 10000[1/.07-1/.07(1.07)^20] = 105,940.14

The effective annual interest rate is equal to

(1+APR/m)^m-1

Which of the following statements are true regarding the present value of a stream of cash payments?

- Nominal cash payments should be discounted using a nominal interest rate - Real cash payments should be discounted using a real interest rate

Which of the following statements are true regarding the present value of a stream of cash payments?

- Real cash payments should be discounted using a real interest rate - Nominal cash payments should be discounted using a nominal interest rate

Which of the following are annuities?

- Yearly lease payments - Annual installment loan payments

If a bank quotes a loan with an APR of 15%, compounded monthly, what is the periodic rate on this loan?

15/12=1.25

$200 at the end of each year forever at 10% per year is worth how much today?

200/.10 = $2,000

If a bank account pays a monthly interest rate on deposits of 0.5%, what is the APR the bank will quote for this account?

6% (12x5=6)

The best known price index used by economists who measure inflation is _____.

CPI - the consumer price index

_____ dollars refer to that actual number of dollars of the day, whereas ______ dollars the amount of purchasing power.

Current/constant Nominal/real

Another name for the interest rate used to calculate PV is the ____ rate.

Discount

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

Fixed

If the interest rates increase, what will happen to PV overtime?

PV will decline

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

Perpetuity

In excel, cash inflows are recognized as ______ values and cash outflows are recognized as ____ values. Interest rates should be entered as _____.

Positive Negative Decimals

Which of the following is a proper definition for the effective annual interest rate?

The interest rate that is annualized using compound interest

The discount factor refers to the present value of a $1 future payment

True

The nominal interest rate can be defined as an interest rate quoted today by a financial institution on a loan or investment, such as an APR or period rate.

True

Perpetuity

a constant stream of cash flows forever

The effective annual interest rate is also known as the ____.

annually compounded rate

The present value of an annuity of $1 per period is called the

annuity factor

An ordinary annuity is a series of level payments that begin..

at the end of one payment period

At a rate of interest of 10%, the present value or $100 will _____ as the time period _____.

decreases;increases

An annuity due is a series of level payments that begin

immediately

If interest rates go down, the present value of a perpetuity will _____.

increase

The equation used to determine the approximate real interest rate is

real interest rate = nominal interest rate - inflation rate

The annual percentage rate (APR) on a loan or investment is properly defined as

the interest rate per period multiplied by the number of compounding periods per year