Finance Chapter 6 Smartbook Questions

b. higher EARs

Given the same APR, more frequent compounding results in _____. Multiple choice question. a. rounder EARs b. higher EARs c. lower EARs

c. Every instant

How frequently does continuous compounding occur? Multiple choice question. a. 1,000 times a year b. 1,000,000 times a year c. Every instant d. 100 times a year

b. end

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period. Multiple choice question. a. middle b. end c. beginning

end

In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the __________ (beginning/end) of each period.

a. semiannual

Interest paid twice a year is known as ______ compounding. Multiple choice question. a. semiannual b. monthly c. weekly d. biannual

d. multiple

Most investments involve _____ cash flows. Multiple choice question. a. lump sum b. no c. single d. multiple

partial

The loan balance on _________ amortization loans declines so slowly because the payments are mostly interest.

b, c

Which of the following are real-world examples of annuities? Multiple select question. a. Common stock dividends b. Mortgages c. Pensions

b. A constant stream of cash flows forever

Which of the following is a perpetuity? Multiple choice question. a. A constant stream of cash flows for a fixed period b. A constant stream of cash flows forever c. A growing stream of cash flows for a fixed period d. An undulating stream of cash flows forever

a. 12%, compounded semiannually

Which of the following is equal to an effective annual rate of 12.36 percent? Multiple choice question. a. 12%, compounded semiannually b. 12%, compounded quarterly c. 12%, compounded monthly d. 12%, compounded annually

c. FV = C ( (1+r)^t − 1 / r) )

Which of the following is the formula for the future value of an annuity? Multiple choice question. a. FV = C ( (1 − (1/(1+r)^t) / r) ) b. FV = C ( (1−r)^t + 1 / r) ) c. FV = C ( (1+r)^t − 1 / r) )

b. A pure discount loan

Which of the following is the simplest form of loan? Multiple choice question. a. A partially amortized loan b. A pure discount loan c. An interest-only loan d. An amortized loan

c. A pure discount loan

Which of the following is the simplest form of loan? Multiple choice question. a. An amortized loan b. A partially amortized loan c. A pure discount loan d. An interest-only loan

d. principal

Amortization is the process of paying off loans by regularly reducing the _________. Multiple choice question. a. payment frequency b. interest rate c. life of the loan d. principal

due

An annuity ___________ is an annuity for which the cash flows occur at the beginning of each period.

b. at the beginning of each period

An annuity due is a series of payments that are made ____. Multiple choice question. a. 1 year in the past b. at the beginning of each period c. any time in the future d. 1 year hence

a. payments are mostly interest

The loan balance on partial amortization loans declines so slowly because the ___. Multiple choice question. a. payments are mostly interest b. payments are mostly principal c. interest rate rises over the years d. yearly payment rises steadily over the years

d. finite number of growing cash flows

A growing annuity has a(n) ____. Multiple choice question. a. infinite number of constant cash flows b. finite number of level cash flows c. infinite number of growing cash flows d. finite number of growing cash flows

b. infinite

A perpetuity is a constant stream of cash flows for a(n) ______ period of time. Multiple choice question. a. finite b. infinite c. random d. undetermined

b. lump sum

A single cash flow is also known as a: Multiple choice question. a. terminal cash flow b. lump sum c. multiple cash flow d. level cash flow

a. one year

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. Multiple choice question. a. one year b. half a year c. two years d. three years

c. two times

Semiannual compounding means that interest is paid ______ per year. Multiple choice question. a. one time b. three times c. two times d. twelve times

true

T/F: The formula for the present value interest factor for annuities is: Annuity present value factor = {1- [1 / (1+r)^t]} / r

false

T/F: There is only one way to quote interest rates.

annual

The ____________ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.

b. present

The formula for the ______ value interest factor of an annuity is {1 - [1 / (1+r)t ] / r} Multiple choice question. a. future b. present

c. [1 − (1/1.10^30)]/.10]

The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______. Multiple choice question. a. [1 − (1.1/1.10^30)]/.10] b. [1 − (1/1.10^30)]/.20] c. [1 − (1/1.10^30)]/.10] d. [1 − (1/1.20^30)]/.10]

a. interest plus a fixed principal amount every period.

The most common way to repay a loan is to pay: Multiple choice question. a. interest plus a fixed principal amount every period. c. just interest every period. b. a lump sum of interest and principal at the end of the loan. d. a fixed amount of interest and a fixed amount of principal each period.

d. principal

The original loan amount is called the _____. Multiple choice question. a. interest only b. amortization c. fixed repayment d. principal

b. [1 − (1/1.08^20)]/.08

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____. Multiple choice question. a. [1 − (1/1.18^20)]/.08 b. [1 − (1/1.08^20)]/.08 c. [1 − (1/1.08^20)]/1.08 d. [1.08 − (1/1.08^20)]/.08

future

The present value of a series of _________ cash flows is the amount you would need today to exactly duplicate those future cash flows.

d. exactly duplicate those future cash flows

The present value of a series of future cash flows is the amount you would need today to _____. Multiple choice question. a. exactly half those future cash flows b. break-even on the given exchange rate c. make the future cash flows equal to zero d. exactly duplicate those future cash flows

d. $100{[1 - (1/(1.10)^20)]/0.10}

What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year? Multiple choice question. a. $100{[1 - (1/(1.10)^20)]/0.20} b. $100{[1 - (1/(1.10)^20)]/1.10} c. $1,100{[1 - (1/(1.10)^20)]/0.10} d. $100{[1 - (1/(1.10)^20)]/0.10}

d. lump

When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum. Multiple choice question. a. stair-step b. reduced c. inflated d. lump

a, c

Which of the following are annuities? Multiple select question. a. Installment loan payments b. Tips to a waiter c. Monthly rent payments in a lease d. Monthly grocery bill

c. $5,000/1.03

You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%? Multiple choice question. a. $5,000 × 1.03 b. $5,000/1.03^2 c. $5,000/1.03

APR

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

EAR

the interest rate stated as though it were compounded once per year

outflow, inflow

A typical investment has a large cash ___________ (inflow/outflow) at the beginning and then a cash _____________ (inflows/outflows) for many years.

b. tradition; legislation

Because of __________ and _________, interest rates are often quoted in many different ways. Multiple choice question. a. religion; randomness b. tradition; legislation c. mathematics; evolution

annuity

The future value factor for a(n)__________ is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.

d. Annual

Which compounding interval will result in the lowest future value assuming everything else is held constant? Multiple choice question. a. Quarterly b. Continuous c. Daily d. Annual

b. $100{[1 − (1/(1.10)^3)]/0.10}

Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year? Multiple choice question. a. $1,000/{[1 − (1/(1.10)^3)]/0.10} b. $100{[1 − (1/(1.10)^3)]/0.10} c. $100{[1 − (1/(1.10)^3)]/1.20} d. $1,100{[1 − (1/(1.10)^3)]/0.20}

a, b

Which of the following is true about a growing annuity? Multiple select question. a. The cash flows grow at a constant rate. b. The cash flows grow for a finite period. c. The cash flows grow for an infinite period. d. The cash flows grow at an irregular rate.

a, c

Which of the following payment methods amortizes a loan? Multiple select question. a. Fixed payments that result in a zero loan balance b. Fixed interest payments only c. Interest plus fixed amount d. Single lump sum payment

b, c

Which of the following processes can be used to calculate future value for multiple cash flows? Multiple select question. a. Find the future value of a single lump sum amount b. 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 d. Discount all of the cash flows back to Year 0

a. repaid at some point in the future

With interest-only loans that are not perpetuities, the entire principal is _____. Multiple choice question. a. repaid at some point in the future b. never repaid c. repaid before any interest payments are made

amortization

____________ is the process of paying off loans by regularly reducing the principal.