Chapter 5 questions
To find the present value of an annuity of $100 per year for 10 years at 10% per year using tables, find a present value factor of 6.1446 and multiply it by _____.
$100
The formula for the present value of an annuity due is:
(1+r) * (PV of an ordinary annuity)
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
Which of the following are ways to amortize a loan?
- fixed payments - interest plus a fixed amount
When entering variables in a spreadsheet function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says outflows are negative values; inflows are positive values. For which variables is this a consideration?
- future value - payment - present value
Which of the following could NOT be evaluated as annuities or annuities due?
- monthly electric bills - tips to a waiter
Which of the following are real-world examples of annuities?
- pensions - leases - mortgages
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 - the payment is found with = PMT(rate, nper, -pv, fv)
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?
= PV(0.10, 10, -100, 0, 0)
Which of the following is an appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?
EFFECT(0.12, 4)
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
Which of the following is a perpetuity?
a constant stream of cash flows forever
The most common way to repay a loan is to pay _____.
a single fixed payment every period
The interest rate charged per period multiplied by the number of periods per year is equal to _____ on a loan.
annual percentage rate
An annuity with payments beginning immediately rather than at the end of the period is called an _____.
annuity due
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
The _____ annual rate is the interest rate expressed as if it were compounded once per year.
effective
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
T/F: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.
false
T/F: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.
false
T/F: The interest rate charged per period on a loan divided by the number of periods per year equals the annual percentage rate.
false
T/F: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.
false
T/F: To find the annuity future value factor, you only need the cash flows and the discount rate.
false
T/F: When using a financial calculator to find the number of payments, the PMT value should be entered as a positive.
false
T/F: With interest-only loans, the principle is never repaid.
false
When calculating annuity present values using a financial calculator, the _____ amount is left blank.
future value
More frequent compounding leads to:
higher EARs
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
When finding the present or future value of an annuity using a spreadsheet, the _____ should be entered as a decimal.
interest rate
An ordinary annuity consists of a(n) _____ stream of cash flows for a fixed period of time.
level
A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with _____-term business loans.
medium
The annuity value factor equals one _____ the present value factor all divided by the discount rate.
minus
Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the _____ value.
nper
The entire principal of an interest-only loan is the:
original loan amount
The ____ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
payment
The _____ present value can be found using the perpetual cash flow and the discount rate.
perpetuity
The present value formula for a(n) _____ is PV=C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
The formula for the _____ value interest factor of annuity is: [1-1/(1+r)^t]/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 $15000 today at a 5% annual interest to be repaid in one year as a lump sum, this is termed a _____.
pure discount loan
Compounding during the year can lead to a difference between the _____ rate and the effective rate.
quoted
EAR = (1 + _____ rate/m)^m -1
quoted
With typical interest-only loans, the entire principal is:
repaid at some point in the future
Because of _____ and _____, interest rates are often quoted in many different ways.
tradition; legislation
T/F: The formula for the future value of an annuity factor is [(1+r)^t -1]/r
true
T/F: The perpetuity present value can be found using the perpetual cash flow and the discount rate.
true
T/F: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
true
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