FRL 3000 Read & Practice: Ch 6 Multi-Period Cash Flows (Time Value of Money)

Which of the following payment methods amortizes a loan?

Fixed payments that result in a zero loan balance Interest plus fixed amount

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

annual

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

An annuity due is a series of payments that are made ____.

at the beginning of each period

When calculating the future value of multiple cash flows using a spreadsheet, you must:

calculate the future value of each cash flow then add the compounded values together.

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

due

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.

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. Listen to the complete question

end

A humped term structure of interest rates indicates that interest rates are expected to Blank______ as the time to maturity increases.

increase and then decline

A perpetuity is a constant stream of cash flows for a(n) ______ period of time.

infinite

The most common way to repay a loan is to pay:

interest plus a fixed principal amount every period.

Most investments involve _____ cash flows.

multiple

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.

one year

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

outflow; inflow

The loan balance on partial amortization loans declines so slowly because the ___.

payments are mostly interest

The original loan amount is called the _____.

prinicpal

With interest-only loans that are not perpetuities, the entire principal is _____.

repaid at some point in the future

Semiannual compounding means that interest is paid ______ per year.

twice

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

Blank 1: Amortization, Amortizing, Amortized, Amortize, Amortisation, Amortising, Amortised, or Amortise

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

FV = C((1+r)^t)−1/r)

True or false: There is only one way to quote interest rates.

False

When calculating the present value of multiple cash flows using a spreadsheet, you must:

calculate the present value of each cash flow then add the discounted values together

A growing annuity has a(n) ____.

finite number of growing cash flows

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then:

paid off in a lump sum bullet payment.

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

partial

The payments in a______ amortization loan are NOT based on the life of the loan.

partial

Interest paid twice a year is known as ______ compounding.

semiannual

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

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?

$100{[1 − (1/(1.10)3)]/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?

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

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?

$402.11 Reason: Correct. Calculate the payment using the PV of an annuity at 10 percent for 3 years. $1,000/[(1 − 1/1.103)/0.10] = $402.11.

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%?

$5,000/1.03

Which of the following is equal to an effective annual rate of 12.36 percent?

12%, compounded semiannually Reason: For annual compounding, the EAR is equal to the APR. For 12% compounded semiannually, EAR = (1 + 0.12/2)2 -1 = 12.36%

In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years.

2 to 30

Which of the following is a perpetuity?

A constant stream of cash flows forever

Which of the following is the simplest form of loan?

A pure discount loan

Match the type of rate with its definition APR EAR

APR The interest rate per period multiplied by the number of periods in the year. EAR The interest rate stated as though it were compounded once per year.

Which compounding interval will result in the lowest future value assuming everything else is held constant?

Annual

Which of the following processes can be used to calculate future value for multiple cash flows?

Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up

How frequently does continuous compounding occur?

Every instant

Which of the following are annuities?

Installment loan payments Monthly rent payments in a lease

Which of the following are ways to amortize a loan?

Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal.

Which of the following are real-world examples of annuities?

Pensions Mortgages

The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]/r}.

Present

Amortization is the process of paying off loans by regularly reducing the _________.

Principal

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.

The U.S. government borrows money by issuing:

Treasury bonds Treasury bills Treasury notes

When the U.S. government wants to borrow money for the long-term (more than one year) it issues:

Treasury bonds Treasury notes

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

True

Which shape does the term structure of interest rates usually have?

Upward sloping

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.

[1 − (1/1.08^20)]/.08

The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______.

[1 − (1/1.10)^30)]/.10]

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