Homework 5

Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the: a. Annual percentage rate b. Compounded rate c. Effective annual rate d. Perpetual rate e. Simple rate

a. Annual percentage rate

Sure needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626? a. present value b. compound value c. future value d. complex value e. factor value

a. present value

Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the: a. Annual percentage rate b. Compounded rate c. Quoted rate d. Stated rate e. Effective annual rate

e. Effective annual rate

In a time value problem, the periodic rate of interest is a. the stated rate of interest b. the nominal rate of interest c. the effective rate of interest d. the actual interest rate earned when compounding is more than once per year e. None of the answers provided is correct

e. None of the answers provided is correct

It is possible to convert the present value of an ordinary annuity table factor to a present value of an annuity due table factor by a. Multiplying the ordinary annuity table factor by (1+r)^n b. Multiplying the ordinary annuity table factor by (1-r)^n c. Dividing the ordinary annuity table factor by (1+r)^n d. Dividing the ordinary annuity table factor by (1-r)^n e. None of the answers provided is correct

e. None of the answers provided is correct

Lester had $6270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as: a. simple interest b. interest on interest c. discounted interest d. complex interest e. compound interest

e. compound interest

The process of finding the future value of dollar is called discounting.

False

When a series of equal flows over equal periods of time occur at the end of each of the periods, the annuity is called an annuity due.

False

When compounding takes place more than once per year, the effective rate of interest is less than the stated or nominal rate of interest

False

For a series of equal flows over equal periods of time, those flows are called annuities.

True

The process of finding the future value of a dollar is called compounding.

True

When a series of equal flows over equal periods of time occur at the end of each of the periods, the annuity is called an ordinary annuity.

True

When compounding takes place more than once per year, the effective rate of interest is greater than the stated or nominal rate of interest

True

Travis is buying a car and will finance it with a loan which requires monthly payments of $265 for the next 4 years. His car payments can be described by which one of the following terms? a. Perpetuity b. Annuity c. Consol d. Lump sum e. Factor

b. Annuity

Martha is investing $5 today at 6% interest so she can have $10 later. the $10 is referred to as the: a. true value b. future value c. present value d. discounted value e. complex value

b. future value

Increasing the required rate of return in a time value problem will a. Increase the present value of the cash flows b. Decrease the future value of the cash flows c. Decrease the present value of the cash flows d. Increase the time required to reach a future value e. None of the answers provided is correct

c. Decrease the present value of the cash flows

The rule of 72 is a special case of compounding that allows the determination of the a. Exact time it takes for a value to double at a specified rate of interest b. Exact rate required for a value to double over a specified period of time c. An estimate of the time it takes for a value to be magnified to a specified level of magnification d. An estimate of either the time it takes for a value to double at a specified rate, or the rate required to double the value over a specified period of time can be determined with the rule of 72 e. None of the answers provided is correct

d. An estimate of either the time it takes for a value to double at a specified rate, or the rate required to double a value over a specified period of time can be determined with the rule of 72

A common term used to describe finding the present value of future flows is a. Compounding b. Capitalizing c. Reduction d. Discounting e. None of the answers provided is correct

d. Discounting

Which one of the following can be classified as an annuity but not as a perpetuity? a. Increasing monthly payments forever b. Increasing quarterly payments for 6 years c. Unequal payments each year for 9 years d. Equal annual payments for life e. Equal weekly payments forever

d. Equal annual payments for life

The Jones Brothers recently established a trust fund that will provide annual scholarships for $12,000 indefinitely. These annual scholarships can best be described by which of the following terms? a. Ordinary annuity b. Annuity due c. Amortized payment d. Perpetuity e. Continuation

d. Perpetuity