FNAN 300 Chapter 5 Connect
An investment offers a perpetual cash flow of $100 every year. The required return on this investment is 10 percent. Which of the following is the value of this investment?
$1,000
Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?
$1,000/[(1-(1/1.10^3)/0.10] = $402.11
You agree to pay back $1,100 in 4 weeks for a $1,000 payday loan. Your annual percentage rate (APR) to two decimal places is ______________%.
$130.00
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 ____________.
$50
What is the present value of an annuity that makes payments of $100 per year for ten years if the first payment is made immediately and the discount rate is 10 percent per year?
$675.90
Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10% yearly interest. How much is the second interest payment?
$80
Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?
(1+quoted rate/m)= -1
A credit card charges 18 percent interest per year (APR) (1.5 percent each month). What is the EAR?
19.56% = (1.015)^12 - 1
If the quoted interest rate is 2% per month (APR = 24%), what is the EAR?
26.82%
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 ______________ and multiply it by ___________.
6.1446; $100
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is _____________.
9.8181
Which of the following Excel functions will result in the correct answer for the following annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8%. How much will you have in this annuity?
=FV(0.08, 10, -100,0)
Which of the following is the formula for the future value of an annuity factor?
[(1+r)^t-1]/r
The most common way to repay a loan is to pay ______________.
a single fixed payment every period
The interest rate charged per period mulitplied by the number of periods per year is the _____________ _______________ _________________.
annual percentage rate (APR)
An annuity with payments beginning immediately rather than at the end of the period is called an ___________.
annuity due
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 add them up or compound the accumulated balance forward one year at a time
The effective annual rate (EAR) takes into account the __________ of interest that occurs within a year.
compounding
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ____________ of the period.
end
Given an annuity that has a payment of $35 per year, an annual interest rate of 3%, and a present value of $130, it will last for ______________ years.
four
A perpetuity is a constant stream of cash flow for a(n) ____________ period of time.
infinite
When finding the present or future value of an annuity using a financial calculator, the ______________ should be entered as a percentage.
interest rate
When finding the present or future value of an annuity using a spreadsheet (Excel), the ____________ should be entered as a decimal.
interest rate
Which of the following are real-world examples of annuities?
leases, pensions, and mortgages
An ordinary consists of a(n) ____________ stream of cash flows for a fixed period of time.
level
The present value of an annuity due is equal to the present value of a(n) _____________ annuity multiplied by (1+r).
ordinary
The entire principal of an interest-only loan is the:
original loan amount
Which of the following are ways to amortize a loan?
pay the interest each period plus some fixed amount of the principal or pay principal and interest every period in a fixed payment
When entering variables 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 variable is this a consideration?
payment, future value, and present value
C/r is the formula for the present value of a(n) _____________.
perpetuity
The formula for the ______________ value interest factor of an annuity is: [1-1/(1+r)^t]/r.
present
Suppose you expect to receive $5,000 in one year, $4,300 more in two years, and an additional $5,000 in three years. Match each present value amount to the corresponding cash flow assuming a discount rate of 17%.
present value of the year 1 cash flow: $4,273.50 present value of the year 2 cash flow: $3,141.21 present value of the year 3 cash flow: $3,121.85
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
An interest rate expressed in terms of the interest payment made each period is called a(n) ________________.
stated interest rate or quoted interest rate
Which of the following could not be evaluated as annuities or annuities due?
tips to a waiter and monthly electric bills
In the Excel setup of a loan amortization problem, which of the following occurs?
to find the principal payment each month, you subtract the dollar interest payment from the fixed payment and the payment is found with =PMT(rate, nper, -pv, fv)
Because of ____________ and ______________, interest rates are often quoted in many different ways.
tradition; legislation
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