Intro to Finance - Conceptual

With the same numbers, which has higher PV and FV... Annuity Due Annuity Ordinary

Annuity Due

Which is higher... EAR APR

EAR

It is better to receive money... sooner later

sooner

All else constant, which one of the following will result in the lowest present value of a lump sum? (A) 8 percent interest for 10 years (B) 8 percent interest for 5 years (C) 6 percent interest for 10 years (D) 6 percent interest for 5 years

A

Caroline is going to receive an award of $20,000 six years from now. Jiexin is going to receive an award of $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent? (A) In today's dollars, Caroline's award is worth more than Jiexin's. (B) Jiexin's award is worth more today than Caroline's award. (C) In future dollars, Jiexin's award is worth more than Caroline's award. (D) Twenty years from now, the value of Caroline's award will equal the value of Jiexin's award.

A

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given the same positive discount rate for both projects? (No calculations needed.) (A) Project X has both a higher present and a higher future value than Project Y. (B) Project Y has a higher present value than Project X. (C) Both projects have the same future value at the end of Year 4. (D) Both projects have the same value at Time 0.

A

Which one of the following actions will increase the present value of an amount to be received sometime in the future? (A) Decrease in the interest rate (B) Decrease in the future value (C) Increase in the discount rate (D) Decrease in both the future value and the number of time periods

A

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent? (A) Annual. (B) Semi-Annual. (C) Monthly. (D) Daily.

A

Fixed principal loans vs fixed payment loans (in terms of interest payments and principal payments)

Fixed Principal = interest payments decrease, principal stays the same Fixed Payment = interest payments decrease, principal increase

Chris has three options for settling an insurance claim. Option A will provide $1,500 a month for 6 years. Option B will pay $1,025 a month for 10 years. Option C offers $85,000 as a lump sum payment today. The applicable discount rate is 6.8 percent compounded monthly. Which option should Chris select, and why, if he is only concerned with the financial aspects of the offers? (A) Option B: It has the largest value today. (B) Option B: It pays the greatest number of payments. (C) Option A: It provides the largest monthly payment. (D) Option C: It is all paid today.

A

Four years ago, Lucas invested $500. Three years ago, Matt invested $600. Today, these two invest- ments are each worth $800. Assume each account continues to earn its respective rate of return and interest is compounded annually. Which one of the following statements is correct concerning these investments? (A) One year ago, Lucas's investment was worth less than Matt's investment. (B) Three years from today, Matt's investment will be worth more than Lucas's investment. (C) Matt earns a higher rate of return than Lucas. (D) Lucas has earned an average annual interest rate of 12.64 percent.

A

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav: (A) could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. (B) will earn simple interest on his savings every year for four years. (C) will earn the same amount of interest each year for four years. (D) could earn more interest on this account if the interest earnings were withdrawn annually.

A

Which one of the following statements related to annuities and perpetuities is correct? (A) A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. (B) An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest compounded annually. (C) The present value of a perpetuity cannot be computed but the future value can. (D) Perpetuities are finite but annuities are not.

A

Which one of the following statements related to loan interest rates is correct? (A) When comparing loans you should compare the effective annual rates. (B) The annual percentage rate considers the compounding of interest. (C) Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. (D) The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

A

You are comparing two annuities that offer regular payments of $2,500 for five years and pay 0.75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while Annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities? (A) Annuity B has a smaller present value than Annuity A. (B) Annuity A has a smaller future value than Annuity B. (C) These two annuities have both equal present and equal future values. (D) Annuity B is an annuity due.

A