FINANCE 301 - CH 6
Which of the following are annuities?
Installment loan payments; Monthly rent payments
Which of the following are real-world examples of annuities?
Pensions; Mortgages
The _____ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the ____ of each period.
end
Given the same APR, more frequent compounding results in _____.
higher EARs
Most investments involve _____ cash flows.
multiple
What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?
$100{[1 - (1/(1.10)20)]/0.10}
Which of the following is the formula for the future value of an annuity?
FV = C((1+r)t−1)/(r)
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.
[1 − (1/1.0820)]/.08
An annuity due is a series of payments that are made ____.
at the beginning of each period
An annuity ______ is an annuity for which the cash flows occur at the beginning of each period.
due
A single cash flow is also known as a:
lump sum
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.
semiannually
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
The formula for the ______ present value is C x [(1-Present value factor)/r]
annuity
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
Which of the following is equal to an effective annual rate of 12.36 percent?
12%, compounded semiannually For monthly compounding, the EAR = (1+0.12/12)12 - 1= 12.68%. For 12% compounded semiannually, EAR = (1 +0.12/2)2 -1 = 12.36%
The present value of a series of future cash flows is the amount you would need today to _____.
exactly duplicate those future cash flows
Which of the following should be valued using a perpetuity formula?
A consol (bond that pays interest only and does not mature); Cash flows from a product whose sales are expected to remain constant forever; Preferred stock
Which of the following processes can be used to calculate future value for multiple cash flows? Discount all of the cash flows back to Year 0 Calculate the future value of each cash flow first and then add them up Compound the accumulated balance forward one year at a time Find the future value of a single lump sum amount
Calculate the future value of each cash flow first and then add them up; Compound the accumulated balance forward one year at a time
Which of the following is true about a growing annuity?
The cash flows grow at a constant rate; The cash flows grow for a finite period.
The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______.
[1 − (1/1.1030)]/.10]
The _____ future value factor is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
The formula for the ______ present value is C × [(1 − Present value factor)/r].
annuity
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
A typical investment has a large cash _____ at the beginning and then a cash _______ for many years.
outflow; inflows
EAR IS
The interest rate stated as though it were compounded once per year.
Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. Which of the following formulas show how much Ralph will give to the charity each year?
$1,000/[(1 − 1/1.103)/0.10]
True or false: There is only one way to quote interest rates.
False
APR IS
The interest rate per period multiplied by the number of periods in the year.
True or false: The formula for the present value interest factor for annuities is PVIF = { 1 - [1/(1+r)*t] } / r Annuity present value factor
True
A growing annuity has a(n) ____.
finite number of growing cash flows
The present value of a series of ____ cash flows is the amount you would need today to exactly duplicate those future cash flows.
future
The present value of a series of ______ cash flows is the amount you would need today to exactly duplicate those future cash flows.
future
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.
lump
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
Semiannual compounding means that interest is paid ______ per year.
two times