FIN Chapter 5
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 is the simplest form of loan?
A pure discount loan
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
True or false: Interest rates can be quoted in various ways.
True
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
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
false
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinte
When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage.
interest rate
The annuity present value factor equals one the present value factor all divided by the discount rate.
minus
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1+ r).
ordinary
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
The general formula for ______ is (1+quoted rate/m)m - 1.
the EAR
The formula for the future value of an annuity factor is [(1+r)t -1]/r.
true
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
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
The formula for the present value of an annuity due is:
(1+r)×(PV of an ordinary annuity)
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).
False
Which of the following is not a way to amortize a loan?
Fixed interest payments only
True or false: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)t]} / r1-[1/(1+r)t]r.
True
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
compounding
True or false: With interest-only loans, the principle is never repaid.
false
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
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
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.
true
Which of the following is the formula for the future value of an annuity factor?
((1+r)(t−1) / r)
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 is a perpetuity?
A constant stream of cash flows forever
An annuity with payments beginning immediately rather than at the end of the period is called an _________.
Annuity due
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)
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
When calculating annuity present values using a financial calculator, the amount is left blank. (Enter the abbreviation only.)
FV
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.
True
An annuity due is a series of payments that are made ____.
at the beginning of each period