FINC 409 Chapter 9 True/False
11. An ordinary annuity exists when the equal payments occur at the beginning of each time period. True or False?
False
12. An annuity due may also be referred to as a deferred annuity. True or False?
False
13. For a given discount rate, an ordinary annuity and an annuity due have the same present value. True or False?
False
16. The effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year. True or False?
False
17. The annual percentage rate is the true opportunity cost measure of the interest rate. True or False?
False
21. Because interest compounds, the annual percentage rate formula will overstate the true interest cost of a loan. True or False?
False
22. The annual percentage rate (APR) overstates the true or effective interest cost. True or False?
False
24. Level cash flow amounts that occur at the end of each period, starting at the end of the first period, are an annuity due. True or False?
False
28. At very high interest rates the "Rule of 72" will result in a small estimation error for the estimate of the time for an investment to double. True or False?
False
3. Simple interest is interest earned on the investment's principal and subsequently-earned interest. True or False?
False
30. The interest portion increases and the principal portion decreases over time under a typical loan amortization schedule. True or False?
False
31. With compound interest, interest is earned only on the investment's principal. True or False?
False
32. If the interest rate is 0% for 10 years, then the present value will be less than the future value. True or False?
False
34. The future value of $100 deposited today for 10 years at 10% compounded annually is $38.55. True or False?
False
36. The present value of a $100 received in 10 years at 10% is $259.37. True or False?
False
38. The future value of a $100 ordinary annuity deposited for 10 years at 10% is $614.46. True or False?
False
39. The present value of a $100 ordinary annuity deposited for 10 years at 10% is $1,593.74. True or False?
False
42. The return provided by a $100 ordinary annuity deposited for 10 years that results in a future value of $1,593.74 is 15%. True or False?
False
46. It will take approximately 9.6 years for a $100 deposit to result in a future value of $600 if I can earn 10% on my deposit. True or False?
False
48. If I earn 3% on my deposit of $500, it will take 9 years before I have $550. True or False?
False
5. As the number of periods increases, present value increases. True or False?
False
1. Money has a time value so long as interest is earned by saving or investing money. True or False?
True
10. An annuity is a series of equal payments that occur over a number of time periods. True or False?
True
14. An amortized loan is repaid in equal payments over a specified time period. True or False?
True
15. A fixed-rate mortgage is an example of an annuity. True or False?
True
18. The method of calculating the annual percentage rate (APR) is set by law. True or False?
True
19. When the annual interest rate stays the same, more frequent interest compounding helps savers earn more interest over the course of the year. True or False?
True
2. As the interest rate increases, present value decreases. True or False?
True
20. For the same annual percentage rate, more frequent compounding increases the future value of an investor's funds more quickly. True or False?
True
23. Compounding means that interest earned each year, plus the principal, will be reinvested at the stated rate. True or False?
True
25. The effective annual rate (EAR) is sometimes called the annual effective yield. True or False?
True
26. The effective annual rate (EAR) is the true opportunity cost measure of the interest rate. True or False?
True
27. At very low interest rates, the "Rule of 72" does not approximate the compounding process well. True or False?
True
29. A loan amortization schedule shows the breakdown of each payment between interest and principal, as well as the remaining balance after each payment. True or False?
True
33. The future value of $100 deposited today for years at 10% compounded annually is $259.37. True or False?
True
35. The present value of $100 received in 10 years at 10% compounded annually is $38.55. True or False?
True
37. The future value of a $100 ordinary annuity deposited for 10 years at 10% is $1,593.74. True or False?
True
4. Compound interest is interest earned on interest in addition to interest earned on the principal. True or False?
True
40. The present value of a $100 ordinary annuity deposited for 10 years at 10% is $614.46. True or False?
True
41. The return provided by a $100 ordinary annuity deposited for 10 years that results in a future value of $1,593.74 is 10%. True or False?
True
43. The return provided by a $100 ordinary annuity deposited for 10 years that results in a future value of $614.46 is negative 11.45%. True or False?
True
44. The return provided by $100 deposited today for 10 years that results in a future value of $614.46 is 19.91%. True or False?
True
45. It will take approximately 18.8 years for a $100 deposit to grow to $600 if I can earn 10% on my deposit. True or False?
True
47. $1000 deposited in a bank that earns 7% per year will become approximately $7,600 in 30 years. True or False?
True
6. If the compound inflation rate were greater than the compound interest rate, future purchasing power on our savings would fall. True or False?
True
7. Discounting is an arithmetic process whereby a future sum decreases at a compounding interest rate over time to reach a present value. True or False?
True
8. The Rule of 72 is an estimate of how long it would take to double a sum of money at a given interest rate. True or False?
True
9. At a zero interest rate, the present value of $1 remains at $1 and is not affected by time. True or False?
True
