Finance Chapter 5

19.56% (1.015)^12 - 1 = 19.56%

A credit card charges 18% interest per year (APR) (1.5% each month). What is the EAR?

infinite

A perpetuity is a constant stream of cash flows for a ________ period of time.

$2,980.59

Alice has $20,000 in an account that pays 8% per year. Alice wants to withdraw equal amounts at the end of the next 10 years. How much will Alice receive each year?

at the beginning of each period

An annuity dues is a series of payments that being ________.

quoted interest rate stated interest rate

An interest rate expressed in terms of the interest payment made each period is called a ________ or ________.

level

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

24%

If quoted interest rate is 2% per month (12 months in a year), what is the APR?

pure discount loan

If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a ________ _________ _________.

end

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

B. to find the principal payment, you subtract the dollar interest payment from the fixed payment D. the payment is found with =PMT(rate, nper, -pv, fv)

In the Excel setup of a loan authorization problem, which of the following occurs? A. to find the dollar interest each month, you multiply the balance times the yearly interest rate B. to find the principal payment, you subtract the dollar interest payment from the fixed payment C. to find the new balance, you subtract the dollar interest from the old balance D. the payment is found with =PMT(rate, nper, -pv, fv)

$50 5% x $1000 = $50

Suppose you borrow $1,000 at 5% interest per year for 10 years. The loan is an interest only loan so each year you will pay ________.

$80 ($1200 - $400) x 0.10 = $80

Suppose you paid a $1200 loan off by paying $400 in principal each year plus 10% yearly interest. How much is the second interest payment?

compounding

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

$1,753.12 100[1.1^10 - 1) / .10][1.10]

The future value of an annuity due of $100 per year for 10 years at 10% per year is:

the EAR - effective annual rate

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

principal

The original amount of a loan is termed the loan ________.

perpetuity

The present value formula for a ________ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

ordinary

The present value of an annuity due is equal to the present value of a ________ annuity multiplied by (1+r).

EEFECT (0.12, 4)

What is the appropriate Excel function to convert a quoted rate od 12% compounded quarterly to an EAR?

[(1+r)^t - 1] ____________ r

What is the formula for future value of an annuity factor?

{1-[1/(1+r)^t]} _______________ r

What is the formula for the present value interest factor for an annuity?

present value future value payment

When entering variable in an Excel function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?

interest rate

When finding the present or future value of an annuity using a spreadsheet (Excel), the ________ ________ should be entered as a decimal.

A. leases C. pensions D. mortages

Which of the following are real-world examples of annuities? A. leases B. common stock dividends C. pensions D. mortages

A. pay principal and interest every period in a fixed payment D. pay the interest each period plus some fixed amount of the principal

Which of the following are ways to amortize a loan? A. pay principal and interest every period in a fixed payment B. pay both interest and principal in one lump sum at maturity C. pay only interest every period and pay the principal off at maturity D. pay the interest each period plus some fixed amount of the principal

A. monthly electric bills C. tips to a waiter

Which of the following could not be evaluated as annuities or annuities due? A. monthly electric bills B. installment loan payments C. tips to a waiter D. monthly rent payments within a lease

D. a constant stream of cash flows forever

Which of the following is a perpetuity? A. an undulating stream of cash flows forever B. a growing stream of cash flows for a fixed period C. a constant stream of cash flows for a fixed period D. a constant stream of cash flows forever

A. calculate the future value of each cash flow first and then add them up C. compound the accumulated balance forward one year at a time

Which of the following processes can be used to calculate the future value of multiple cash flows? A. calculate the future value of each cash flow first and then add them up B. find the future value of a single lump sum amount C. compound the accumulated balance forward one year at a time D. discount all of the cash flows back to year 0

260% 26 x 10%

You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2 week period. What is your stated annual interest rate?