Chapter 5: Discounted Cash Flow Valuation

Which of the following is the formula for the future value of an annuity factor?

((1+r)t−1)/r

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)m - 1

1. True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

1. True

10. True or false: Interest rates can be quoted in various ways.

10. True

11. True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).

11. False, Using the Excel formula to convert a quoted rate (or an APR) to an effective rate, use the formula EFFECT(nominal_rate, npery).

12. True or false: With interest-only loans, the principal is never repaid.

12. False, With interest-only loans, the principle is repaid at some point in the future

2. True or false: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)t]}r .

2. True

3. True/False: The formula for the future value of an annuity factor is [(1+r)t -1]/r.

3. True

4. True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

4. False

5. True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

5. True

6. True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.

6. True

7. The formula for the future value of an annuity factor is [(1+r)^t -1]/r.

7. True

8.True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

8. False

9. True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

9. True

Which of the following is a perpetuity?

A constant stream of cash flows forever

Which of the following is the simplest form of loan?

A pure discount loan

Which of the following processes can be used to calculate the future value of multiple cash flows?

Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then sum them

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

EAR

Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?

EFFECT(0.12,4)

When calculating annuity present values using a financial calculator, the Input Field 1 of 1 future value unavailable incorrect__________amount is left blank.

FV

Which of the following is not a way to amortize a loan?

Fixed interest payments only

You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the _____ value on the financial calculator.

N

An annuity with payments beginning immediately rather than at the end of the period is called an _________.

annuity due

An annuity due is a series of payments that are made ____.

at the beginning of each period

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

compounding

One step in calculating an EAR is to ________ the quoted rate by the number of times that the interest is compounded.

divide

One step in calculating an EAR is to ___________the quoted rate by the number of times that the interest is compounded.

divide

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

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

end

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

A perpetuity is a constant stream of cash flows 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

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

level

The annuity present value factor equals one of _________the present value factor all divided by the discount rate.

minus

The entire principal of an interest-only loan is the:

original loan amount

The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)^τ]/r

present

Amortization is the process of paying off loans by regularly reducing the _________.

principal

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

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

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