Finance Ch. 5 True/False
Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.
True
Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.
True
If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
True
If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
True
If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.
True
Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.
True
Starting to invest early for retirement increases the benefits of compound interest.
True
Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
True
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.
True
The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.
True
The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.
True
Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
True
Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
True
When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.
True
When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.
False
Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal. This is true regardless of the original life of the loan or the interest rate on the loan.
False
Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts
False
Starting to invest early for retirement reduces the benefits of compound interest.
False
Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
False
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
False
The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.
False
The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant
False
Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
False
Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
False
A "growing annuity" is any cash flow stream that grows over time.
False
A time line is not meaningful unless all cash flows occur annually.
False
All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.
False
As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).
False
Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.
False
If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
False
If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.
False
If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.
False
A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.
True
A time line is meaningful even if all cash flows do not occur annually.
True
All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.
True
As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).
True
