Finance Chapter 6 Smartbook Questions

With a fixed payment loan, the amount of interest paid ----------(decreases/increases) each period.

decreases

The payments in a Blank______ amortization loan are NOT based on the life of the loan. Multiple choice question. federal remunerative partial full

partial

a. one year

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. Multiple choice question. a. one year b. half a year c. two years d. three years

amortization

____________ is the process of paying off loans by regularly reducing the principal.

Which loan type requires the borrower to repay a single lump sum payment at some time in the future with interest? Multiple Choice Interest-only Monthly Amortized Annual Amortized

Pure Discount

rue or false: A fixed payment loan is most common for consumers.

true

What is formula to calculate the present value of an annuity that makes payments of $100 per year for 10 years if the first payment is made immediately and the discount rate is 10 percent per year?

$100[(1 − 1/1.1010)/0.10][1.10]

Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year? Multiple choice question. =PV(10,-100,.1,0,) =PV(.10,10,100,0,) =PV(100,.1,0,10,) =PV(.10,10,-100,0,)

=PV(0.10,10,-100,0,0)

b. tradition; legislation

Because of __________ and _________, interest rates are often quoted in many different ways. Multiple choice question. a. religion; randomness b. tradition; legislation c. mathematics; evolution

Which of the following is the formula for the future value of an annuity?

FV = C((1+r)t−1r)

Which type of amortization is most commonly used in the real world for mortgages and car loans? Multiple choice question. Variable period Fixed interest Fixed principal Fixed payment

Fixed payment

You may use which of the following sets of inputs together to solve for the present value of an annuity using a financial calculator? Multiple choice question. N, I/Y, PMT, PV N, I/Y, RATE, PV RATE, PV, NPV, I/Y N, NPER, PMT, PV

N, I/Y, PMT, PV

The variables in a present value of an annuity problem include all of the following, except: Time period Risk Profile Interest rate Payments

Risk Profile

a. 12%, compounded semiannually

Which of the following is equal to an effective annual rate of 12.36 percent? Multiple choice question. a. 12%, compounded semiannually b. 12%, compounded quarterly c. 12%, compounded monthly d. 12%, compounded annually

The future value factor for a(n)------ is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.

annuity

What is the future value of $500 invested each year for 20 years at a rate of 10%?

n=20 1/yr= 10 pv=0 PMT=-500 ?FV=28637.50

The loan balance on _-------- amortization loans declines so slowly because the payments are mostly interest.

partial

When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the ______ as a negative value. 1.payment 2.interest rate 3.type of annuity 4.number of periods

payment

The loan balance on partial amortization loans declines so slowly because the ___. *payments are mostly interest. *yearly payment rises steadily over the years. *payments are mostly principal. *interest rate rises over the years.

payments are mostly interest

APR

the interest rate per period multiplied by the number of periods in the year

When using a financial calculator to find the interest rate, you may use the inputs N, PMT, and PV to find 1/ ___.

y

What is the formula to calculate the future value of an annuity due of $100 per year for 10 years at 10 percent per year? Multiple choice question. $100[(1.1010 − 1)/0.10][1.10] $1[(1.1010 − 1)/0.10][1.10] $100[(1.1010 − 1)/1.10][1.10] $1,000[(1.1010 − 1)/0.10][1.10]

$100[(1.1010 − 1)/0.10][1.10]

false

T/F: There is only one way to quote interest rates.

Which of the following should be valued using a perpetuity formula? Multiple select question. A consol (bond that pays interest only and does not mature) An amortized loan with a set amount over a period of time Preferred stock Cash flows from a product whose sales are expected to remain constant forever

*Preferred stock *ash flows from a product whose sales are expected to remain constant forever -a consol *A consol (bond that pays interest only and does not mature)

To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ______ and multiply that by ______. 3.7908; $100 3.1699; 10 4.3553; 10 7.7217; $100

3.7908; $100

b. A pure discount loan

Which of the following is the simplest form of loan? Multiple choice question. a. A partially amortized loan b. A pure discount loan c. An interest-only loan d. An amortized loan

a. repaid at some point in the future

With interest-only loans that are not perpetuities, the entire principal is _____. Multiple choice question. a. repaid at some point in the future b. never repaid c. repaid before any interest payments are made

b, c

Which of the following processes can be used to calculate future value for multiple cash flows? Multiple select question. a. Find the future value of a single lump sum amount b. Calculate the future value of each cash flow first and then add them up c. Compound the accumulated balance forward one year at a time d. Discount all of the cash flows back to Year 0

outflow, inflow

A typical investment has a large cash ___________ (inflow/outflow) at the beginning and then a cash _____________ (inflows/outflows) for many years.

*The cash flows grow for a finite period. *The cash flows grow at a constant rate.

Which of the following is true about a growing annuity? Multiple select question. a. The cash flows grow at a constant rate. b. The cash flows grow for a finite period. c. The cash flows grow for an infinite period. d. The cash flows grow at an irregular rate.

Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%? Multiple choice question. Enter 100 for PMT, 10 for N, and 5 for I/Y. Solve for FV. Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV. Enter 400 for N, 10 for PMT, and 5 for I/Y. Solve for FV.

Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.

The variable that you are solving for in a future value of an annuity problem is: Multiple Choice Present value Future value Time period Interest rate Payments

Future value

d. principal

Amortization is the process of paying off loans by regularly reducing the _________. Multiple choice question. a. payment frequency b. interest rate c. life of the loan d. principal

due

An annuity ___________ is an annuity for which the cash flows occur at the beginning of each period.

b. at the beginning of each period

An annuity due is a series of payments that are made ____. Multiple choice question. a. 1 year in the past b. at the beginning of each period c. any time in the future d. 1 year hence

b. higher EARs

Given the same APR, more frequent compounding results in _____. Multiple choice question. a. rounder EARs b. higher EARs c. lower EARs

Which loan type requires calls for the borrower to pay interest each period and to repay the entire principal at some point in the future? Interest-only Monthly Amortized Annual Amortized Future Principal Pure Discount

Interest-only

Which of the following is true about a growing annuity?

The cash flows grow for a finite period. The cash flows grow at a constant rate.

a. interest plus a fixed principal amount every period.

The most common way to repay a loan is to pay: Multiple choice question. a. interest plus a fixed principal amount every period. c. just interest every period. b. a lump sum of interest and principal at the end of the loan. d. a fixed amount of interest and a fixed amount of principal each period.

annuity

The future value factor for a(n)__________ is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.

partial

The loan balance on _________ amortization loans declines so slowly because the payments are mostly interest.

A perpetuity is a constant stream of cash flows for a(n) ______ period of time. Multiple choice question. finite random infinite undetermined

infinite

To use a present value of an annuity table to find the present value of an annuity factor, search the Blank______ for the number of periods and the Blank______ for the rate. Multiple choice question. row; diagonal column; row row; column diagonal; column

row; column

The formula for the present value of an annuity due is _____. Multiple choice question. (1 + r) + (PV of an ordinary annuity) (PV of an ordinary annuity)/(1 + r) (PV of an ordinary annuity) - (1 + r) (1 + r) × (PV of an ordinary annuity)

(1 + r) × (PV of an ordinary annuity)

Which of the following is the simplest form of loan?

A pure discount loan

You are planning to buy a CD for $1,352. You will receive $1,500 in 2 years. Which inputs will you use in a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding? Multiple choice question. Enter −1,500 for PV, 2 for N, and 1,352 for FV. Solve for I/Y. Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y. Enter −1,352 for PV, 10 for N, and 1,500 for FV. Solve for I/Y. Enter −1,000 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.

Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.

a. payments are mostly interest

The loan balance on partial amortization loans declines so slowly because the ___. Multiple choice question. a. payments are mostly interest b. payments are mostly principal c. interest rate rises over the years d. yearly payment rises steadily over the years

d. exactly duplicate those future cash flows

The present value of a series of future cash flows is the amount you would need today to _____. Multiple choice question. a. exactly half those future cash flows b. break-even on the given exchange rate c. make the future cash flows equal to zero d. exactly duplicate those future cash flows

The variables in a future value of an annuity problem include all of the following, except: Usage Correct Future Value Payments Time period Interest rate

Usage

The variables in a future value of an annuity problem include all of the following, except: Future Value Payments Time period Interest rate Volatility

Volatility

d. $100{[1 - (1/(1.10)^20)]/0.10}

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? Multiple choice question. a. $100{[1 - (1/(1.10)^20)]/0.20} b. $100{[1 - (1/(1.10)^20)]/1.10} c. $1,100{[1 - (1/(1.10)^20)]/0.10} d. $100{[1 - (1/(1.10)^20)]/0.10}

A growing annuity has a(n) ____. Multiple choice question. finite number of level cash flows infinite number of growing cash flows infinite number of constant cash flows finite number of growing cash flows

finite number of growing cash flows

You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%? Multiple choice question. $5,000/1.032 $5,000 × 1.03 $5,000/1.03

$5,000/1.03

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. How much will Ralph give to the charity each year? Multiple choice question. $412.98

$402.11

c. A pure discount loan

Which of the following is the simplest form of loan? Multiple choice question. a. An amortized loan b. A partially amortized loan c. A pure discount loan d. An interest-only loan

If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity. Multiple choice question. greater than less than equal to

greater than

b. infinite

A perpetuity is a constant stream of cash flows for a(n) ______ period of time. Multiple choice question. a. finite b. infinite c. random d. undetermined

How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)? Increase the time needed to save. Decrease the present value. Correct Increase the present value. Change the future value.

Decrease the present value.

Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $100 per year for 10 years at 15%? Multiple choice question. Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV. Enter 100 for N, 10 for PMT, and 15 for I/Y. Solve for FV. Enter 100 for PMT, 10 for N, and 5 for I/Y. Solve for FV.

Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV.

Which of the following show the inputs you would use in a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%? Multiple choice question. In your financial calculator, enter 100 for PMT, 5 for N, and 30 for I/Y. Solve for PV. In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV. In your financial calculator, enter 5 for PMT, 30 for N, and 5 for I/Y. Solve for PV.

In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV.

a. semiannual

Interest paid twice a year is known as ______ compounding. Multiple choice question. a. semiannual b. monthly c. weekly d. biannual

d. multiple

Most investments involve _____ cash flows. Multiple choice question. a. lump sum b. no c. single d. multiple

b. [1 − (1/1.08^20)]/.08

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____. Multiple choice question. a. [1 − (1/1.18^20)]/.08 b. [1 − (1/1.08^20)]/.08 c. [1 − (1/1.08^20)]/1.08 d. [1.08 − (1/1.08^20)]/.08

future

The present value of a series of _________ cash flows is the amount you would need today to exactly duplicate those future cash flows.

If the interest rate is greater than ,--------- the value of an annuity due is always greater than an ordinary annuity.

zero

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 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. *The amortization period is longer than the loan period.

d. finite number of growing cash flows

A growing annuity has a(n) ____. Multiple choice question. a. infinite number of constant cash flows b. finite number of level cash flows c. infinite number of growing cash flows d. finite number of growing cash flows

b. lump sum

A single cash flow is also known as a: Multiple choice question. a. terminal cash flow b. lump sum c. multiple cash flow d. level cash flow

c. Every instant

How frequently does continuous compounding occur? Multiple choice question. a. 1,000 times a year b. 1,000,000 times a year c. Every instant d. 100 times a year

b. end

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period. Multiple choice question. a. middle b. end c. beginning

end

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 __________ (beginning/end) of each period.

A common error made when solving a future value of an annuity problem is: Using factor tables to help solve the problem. Dividing the annual deposit by the number of years before calculating the problem. Using a financial calculator to help solve the problem. Multiplying the number of years and the interest rate before calculating the problem. Multiplying the annual deposit and the number of years before calculating the problem.

Multiplying the annual deposit and the number of years before calculating the problem.

c. two times

Semiannual compounding means that interest is paid ______ per year. Multiple choice question. a. one time b. three times c. two times d. twelve times

The variables in a present value of an annuity problem include all of the following, except: Time period Interest rate Correct Payments

Source of funds

true

T/F: The formula for the present value interest factor for annuities is: Annuity present value factor = {1- [1 / (1+r)^t]} / r

The variable that you are solving for in a present value of an annuity problem is: The Present value Correct Time period Interest rate Payments

The Present value

annual

The ____________ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.

b. present

The formula for the ______ value interest factor of an annuity is {1 - [1 / (1+r)t ] / r} Multiple choice question. a. future b. present

c. [1 − (1/1.10^30)]/.10]

The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______. Multiple choice question. a. [1 − (1.1/1.10^30)]/.10] b. [1 − (1/1.10^30)]/.20] c. [1 − (1/1.10^30)]/.10] d. [1 − (1/1.20^30)]/.10]

d. principal

The original loan amount is called the _____. Multiple choice question. a. interest only b. amortization c. fixed repayment d. principal

Which of the following are true about the amortization of a fixed payment loan? Multiple select question. *The payment amount decreases each period. *The amount of interest and principal paid increases each period. *The amount of interest paid decreases each period. *The principal amount paid increases each period.

The principal amount paid increases each period.The amount of interest paid decreases each period.

d. lump

When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum. Multiple choice question. a. stair-step b. reduced c. inflated d. lump

d. Annual

Which compounding interval will result in the lowest future value assuming everything else is held constant? Multiple choice question. a. Quarterly b. Continuous c. Daily d. Annual

b. $100{[1 − (1/(1.10)^3)]/0.10}

Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year? Multiple choice question. a. $1,000/{[1 − (1/(1.10)^3)]/0.10} b. $100{[1 − (1/(1.10)^3)]/0.10} c. $100{[1 − (1/(1.10)^3)]/1.20} d. $1,100{[1 − (1/(1.10)^3)]/0.20}

a, c

Which of the following are annuities? Multiple select question. a. Installment loan payments b. Tips to a waiter c. Monthly rent payments in a lease d. Monthly grocery bill

b, c

Which of the following are real-world examples of annuities? Multiple select question. a. Common stock dividends b. Mortgages c. Pensions

b. A constant stream of cash flows forever

Which of the following is a perpetuity? Multiple choice question. a. A constant stream of cash flows for a fixed period b. A constant stream of cash flows forever c. A growing stream of cash flows for a fixed period d. An undulating stream of cash flows forever

c. FV = C ( (1+r)^t − 1 / r) )

Which of the following is the formula for the future value of an annuity? Multiple choice question. a. FV = C ( (1 − (1/(1+r)^t) / r) ) b. FV = C ( (1−r)^t + 1 / r) ) c. FV = C ( (1+r)^t − 1 / r) )

a, c

Which of the following payment methods amortizes a loan? Multiple select question. a. Fixed payments that result in a zero loan balance b. Fixed interest payments only c. Interest plus fixed amount d. Single lump sum payment

c. $5,000/1.03

You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%? Multiple choice question. a. $5,000 × 1.03 b. $5,000/1.03^2 c. $5,000/1.03

The present value of a(n) ----------of C dollars per period for t periods when the rate of return or interest rate, r, is given by: C × (1 − [1/(1 + r)t]r/)

annuity

The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r). Multiple choice question. actuarial middle deferred ordinary

ordinary

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then: Multiple choice question. amortized just like the first part. amortized over the remaining loan period. forgiven by the lender. paid off in a lump sum bullet payment.

paid off in a lump sum bullet payment

EAR

the interest rate stated as though it were compounded once per year