FIN 320 CH 5
What is the present value of the following cash flow stream discounted at 6%? $100 in years in 1 years and 2 followed by $200 in years 3 and 4
$509.68
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 (1,200 - 400) x .10
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
Which of the following processes can be used to calculate the future value of multiple cash flows?
-compound the accumulated balance forward on year at a time -calculate the future value of each cash flow first and then add them up
In the Excel setup of a loan amortization problem, which of the following occurs?
-the payment is found with =PMT (rate,nper,-pv,0) -to find the principal payment each month you subtract the dollar interest payment from the fixed payment
A credit card charges 1.5% interest each month. What is the EAR?
19.56% (1.015)^12 - 1
Which of the following is not a way to amortize a loan?
Fixed interest payments only
Which of the following is the simplest form of loan?
a pure discount loan
An annuity with payments beginning immediately rather than at the end of the period is called an ___
annuity due
In almost all multiple cash flow calculations, it is implicitly assumes that the cash flows occur at the __ of each period.
end
For a stated positive interest rate, the EAR is always __ the APR
equal to or greater than
An annuity due is a series of payments that begin ___
immediately
An ordinary annuity consists of a(n)__ stream of cash flows for a fixed period of time.
level
The formula for the ___ value interest factor of an annuity is [1-1 /( 1 +r)^t] / r
present
The original amount of a loan is termed the loan ___
principal
Which of the following are ways to amortize a loan?
-pay principal and interest every period in a fixed payment -pay the interest each period plus some fixed amount of the principal
C/r is the formula for the present value of a(n)___
perpetuity
An interest rate expressed in terms of the interest payments made each period is called a(n)___
-stated interest rate -quoted interest rate
Because of __ and ____, interest rates are often quoted in many different ways
traditions; legislation
Amortization is the process of paying off loans by regularly reducing the ___.
principal
Which of the following is a perpetuity?
A constant steam of cash flows forever
The most common way to repay a loan is to pay ___
a single fixed payment every period
A perpetuity is a constant stream of cash flow for a(n) ____ period of time
infinite
The effective annual rate (EAR) takes into account the __ of the interest that occurs within a year.
Compounding
The general formula for ____ is (1 + quoted rate / m) ^m - 1
EAR
What is the future value of $100 deposited each year for 2 years beginning next year, then $200 deposited for the next two years if you can earn 6% per year?
$643.46
Which of the following could not be evaluated as annuities?
-monthly electric bills -tips to a waiter
Which of the following are real-world examples for annuities?
-pensions -preferred stock dividends -mortgages -leases
The formula for the present value of an annuity due is:
(1+r) x (PV of an ordinary annuity)
When entering variables in an Excel functions (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 -present value -future value
When finding the present or future value of an annuity using a spreadsheet (Excel), the ___ should be entered as a decimal.
interest rate
