Chapter 6 Question bank
if the interest rate is 10% per week, what is the EAR? [please note that 10% per week is not an APR. It is a weekly rate (Quoted rate/m)]. assume 52 weeks in a year.
14104%
what is the present value of an ordinary annuity that pays $100 per year for 3 years if the interest rate is 10% per year?
$248.69
match the type of rate with its definition. APR: EAR:
**** the interest rate per period multiplied by the number of periods in the year. = APR **** the interest rate stated as though it were compounded once per year. = EAR **** **** **** ****
payday loans allow you to ___.
are now and repay later
one example of a perpetuity is a British ___.
consol
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
if the interest rate is greater than zero, the value of an annuity due is always ___ an ordinary annuity.
greater than
given the same APR, more frequent compounding results in ___.
higher EARs
the loan balance on partial amortization loans declines so slowly because the ___.
payments are mostly interest
what is the future value of an annuity due at $100 per year for 10 years at 10% per year?
**** $1,753.12 **** **** **** **** ****
use your financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%.
**** $5,031.16 **** **** **** **** ****
a credit card charges 18% interest per year (APR) (1.5% each month). What is the EAR?
19.56%
you are planning to buy a CD for $1,352. You will receive $1,500 in 2 years. use a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding.
5.33%
which of the following processes can be used to calculate future value for multiple cash flows?
<> compounded accumulated balance forward one year at a time. <> calculate the future value of each cash flow first and then add them up
when calculating the future value of multiple cash flows using a spreadsheet, you must ___.
calculate the future value of each cash flow then add the compounded values together
when calculating the present value of multiple cash flows using a spreadsheet, you must ___.
calculate the present value of each cash flow and then add the discounted values together
how frequently does continuous compounding occur?
every instant
the general formula for the EAR is ___.
(1+r/m)^m - 1
the present value of an annuity due is equal to the present value of a(n) ___ annuity multiplied by (1+r).
**** ordinary **** **** **** **** ****
suppose you need $5,000 in one year, $4,300 in two years, and $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 one cash flow = $4,273.50 **** present value of the year to cash flow = $3,141.21 **** present value of the year 3 cash flow = $3,121.85 **** **** ****
a perpetuity is a constant stream of cash flows for a(n) ___ period of time.
infinite
which of the following are real-world examples of annuities?
√ pensions √ mortgages
In the Excel set up of a loan amortization problem, which of the following occurs?
√ the payment is found using PMT (rate,nper,-pv,fv). √ to find the principal payment each month, you subtract the interest payment from the total payment.
to find the present value of an annuity of $100 per year for 5 years at 10% per year using tables, look up the present value interest factor which is ___ and multiply that by ___.
3.7908; $100
which of the following is true about a growing annuity?
√ the cash flows grow at a constant rate. √ the cash flows grow for finite period.
which of the following are true about a partial amortization loan?
√ the monthly payment is based on a longer amortization period than the maturity of the loan. √ the amortization period is longer than the loan period. √the borrower makes a large balloon payment at the end of the loan period. √ the monthly payments do not fully pay off the loan by the end of the loan period.
you are considering an investment that will earn the following cash flows over the next three years. you expect to earn 6% return on the investment. match each cash flow with its present value, then match the total amount you should pay for the investment today to the appropriate box. Year 1 $5,000. Year 2 $6,000. Year 3 $5,500.
**** Year 1. $4,716.98 **** Year 2. $5,339.98 **** Year 3. $4,617.91 **** amount you should pay for the investment = $14,674.87 **** ****
you expect to receive bonuses with your job at the end of each year for the next five years. assume you can invest all of your bonuses at 4.5%, and the bonuses are as shown below, match each amount to its future value at the end of the five years, then match the total to the appropriate box. Year 1 $500; Year 2 $1,200; Year 3 $1,000; Year 4 $2,400; Year 5 $2,200.
**** Year 1 $596.26 **** Year 2 $1,369.40 **** Year 3 $1,092.03 **** Year 4 $2,508 **** Year 5 $2,200 **** Total after 5 years $7,765.68
what are two ways to calculate a balloon payment?
**** amortize the loan over the loan life to find the ending balance **** find the present value of the payments remaining after the loan term. **** **** **** ****
what is the difference in the future value of $100 at 7% interest for 5 years if the interest is compounded semi-annually rather than annually?
$0.80
use a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%.
$1,537.25
find the future value of an annuity of $100 per year for 10 years at 10% per year.
$1,593.74
a lump sum payment to pay off the balance of a partially amortized loan is called a ___ payment.
balloon or bullet
