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FIN 325 > Chapter 5-6 > Flashcards

Chapter 5-6 Flashcards

1
Q

A dollar received one year from today has _____ value than a dollar received today.
A. More
B. Less
C. The Same

A

B. Less

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2
Q

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
A. (1–r)
B. (1×r)
C. (1/r)
D. (1+r)

A

D. (1+r)

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3
Q

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called

A

compounding

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4
Q

The multi-period formula for future value using compounding is FV = (1 + r)t.
True or False

A

FALSE FV = PV × (1 + r)t (subscript)

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5
Q

The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.
A. simple; bigger
B. interest; smaller
C. discount; bigger

A

A. simple; bigger

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6
Q

Why is a dollar received today worth more than a dollar received in the future?
A. Today’s dollar can be reinvested, yielding a greater amount in the future.
B. A dollar will be worth as much in the future as it is today.
C. A dollar today is not worth more than a dollar in the future.

A

A. Today’s dollar can be reinvested, yielding a greater amount in the future.

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7
Q

The ______________value is the current value of future cash flows discounted at the appropriate discount rate

A

present

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8
Q

In general, if you invest for one period at an interest rate of r, your investment will grow to 1 _____________ (minus/plus) r.

A

plus

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9
Q

The idea behind ______ is that interest is earned on interest.

A. rebounding
B. compounding
C. reinsurance
D. simplification

A

B. compounding

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10
Q

Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?

A. FV = $100 × 0.10 × 3
B. FV = $100 × 1.10 × 3
C. FV = $100 × (1.10)3
D. FV = $100÷(1.10)3

A

C. FV = $100 × (1.10)3

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11
Q

Which of the following investments would result in a higher future value?Investment A - 12% APR for 10 yearsInvestment B - 12% APR for 12 years

A. Both investments would result in the same future value.
B. Investment A
C. Investment B

A

C. Investment B

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12
Q

Assume you are investing $100 today in a savings account. Which of the following terms refers to the total value of this investment one year from now?
A. Future value
B. Present value
C. Principal amount
D. Discounted value
E. Invested principal

A

A. Future value

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13
Q

The interested earned on both the initial principal and interest reinvested from prior periods is called:
A. free interest.
B. dual interest.
C. simple interest.
D. interest on interest
E. compound interest.

A

E. Compound interest

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14
Q

Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of those winnings is called the:
A. single amount.
B. future value.
C. present value.
D. simple amount.
E. compounded value.

A

C. present value

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15
Q

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:
A. current yield
B. effective rate
C. compound rate
D. simple rate
E. discount rate

A

E. discount rate

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16
Q

Which one of the following variables is the exponent in the present value formula?
A. Present value
B. future value
C. interest rate
D. number of time periods
E. there is no exponent in the present value formula

A

D. number of time periods

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17
Q

What is the future value of $3,008 invested for 10 years at 5.3 percent compounded annually?
A. $8,238.14
B. $3,907.22
C. $5,041.52
D. $8,449.78
E. $3,894.21

A

C. $5,041.52

use FV in excel
=FV(0.053,10,,-3008)

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18
Q

Retirement Investment Advisors, Incorporated, has just offered you an annual interest rate of 3.9 percent until you retire in 45 years. You believe that interest rates will increase over the next year and you would be offered 4.5 percent per year one year from today. If you plan to deposit $10,500 into the account either this year or next year, how much more will you have when you retire if you wait one year to make your deposit?
A. $19,690.33
B. $2,643.03
C. $18,520.04
D. $13,743.53
E. $14,095.38

A

E. $14,095.38

find Future value of 3.9 (45 yrs) and Future value of 4.5 (44 yrs) and find difference
=FV(0.039,45,,-10500)
=FV(0.045,44,,-10500)

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19
Q

What is the present value of $13,050 to be received 2 years from today if the discount rate is 6 percent?
A. $12,311.32
B. $11,188.27
C. $7,830.00
D. $11,614.45
E. $10,313.60

A

D. $11,614.45

in Excel - =PV(0.06,2,,-13050)

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20
Q

Three years ago, you invested $3,350. Today, it is worth $4,100. What rate of interest did you earn?
A. 4.47 %
B. .58 %
C. 6.97 %
D. 5.47 %
E. 3.49 %

A

C. 6.97 %

in excel - =RATE(3,,-3350,4100,1)

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21
Q

Maxxie purchased a tract of land for $24,500. Today, the same land is worth $43,800. How many years have passed if the price of the land has increased at an annual rate of 6.4 percent?
A. 8.32 years
B. 8.03 years
C. 8.43 years
D. 7.02 years
E. 9.36 years

A

E. 9.36 years

In Excel

=NPER(0.064,,-24500,43800,1)

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22
Q

Your credit card company charges you 1.37 percent per month. What is the APR on your credit card?
A. 16.44%
B. 17.74%
C. 15.62%
D. 18.62%
E. 17.09%

A

A. 16.44%

From text book: The APR is equal to the interest rate per period multiplied by the number of periods in a year. ie. if a bank is charging 1.2% per month on car loans, then the APR that must be reported is 1.2% x 12 = 14.4%

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23
Q

What is the effective annual rate for an APR of 11.20 percent compounded quarterly?

A. 11.68%
B. 11.79%
C. 11.74%
D. 12.26%
E. 11.20%

A

A. 11.68%

EAR = [1+(.112/4)]^4 minus 1)

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24
Q

You just won the $60 million Ultimate Lotto jackpot. Your winnings will be paid as $3,000,000 per year for the next 20 years. If the appropriate interest rate is 6.3 percent, what is the value of your windfall?
A. $35,703,174.54
B. $33,587,182.07
C. $32,703,174.54
D. $31,907,822.96
E. $34,706,754.80

A

B. $33,587,182.07

PV = $3,000,000[(1 − 1/1.06320)/.063] = $33,587,182.07

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25
Q

Which one of the following statements related to annuities and perpetuities is correct?

A. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest compounded annually.

B. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

C. Most loans are a form of a perpetuity.

D. The present value of a perpetuity cannot be computed but the future value can.

E. Perpetuities are finite but annuities are not.

A

B. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

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26
Q

The interest rate that is most commonly quoted by a lender is referred to as the:

A. annual percentage rate.
B. compound rate.
C. effective annual rate.
D. simple rate.
E. common rate.

A

A. annual percentage rate.

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27
Q

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.
A. stated
B. discounted annual
C. effective annual
D. periodic monthly
E. consolidated monthly

A

C. effective annual

28
Q

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

A. Annual
B. Semi-annual
C. Monthly
D. Daily
E. Continuous

A

A. Annual

29
Q

The most common type of medium-term, amortized business loans has which one of these characteristics over its life?
A. Equal principal payments
B. One lump-sum principal payment
C. Increasing principal payments
D. Equal interest payments
E. Declining periodic payments

A

A. Equal principal payments

30
Q

What is the future value of $3,325 per year for 20 years at an interest rate of 7.29 percent?
A. $135,853.19
B. $134,587.48
C. $140,705.09
D. $134,375.33
E. $128,045.57

A

C. $140,705.09

in Excel

=FV(0.0729,20,-3325,,0)

31
Q

George Jefferson established a trust fund that will provide $191,500 per year in scholarships. The trust fund earns an annual return of 2.8 percent. How much money did Mr. Jefferson contribute to the fund assuming that only income is distributed?
A. $5,984,375.00
B. $6,313,186.81
C. $7,816,326.53
D. $6,839,285.71
E. $5,699,404.76

A

D. $6,839,285.71

in Excel

=191500/0.028

32
Q

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

A. simplifying.
B. compounding.
C. aggregating.
D. accumulating.
E. discounting.

A

B. compounding.

33
Q

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

A. Free interest
B. Complex interest
C. Simple interest
D. Interest on interest
E. Compound interest

A

C. Simple interest

34
Q

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:
A. growth analysis
B. discounting
C. accumulating
D. compounding
E. reducing

A

B. discounting

35
Q

The process of determining the present value of future cash flows in order to know their value today is referred to as:
A. compound interest valuation.
B. interest on interest valuation.
C. discounted cash flow valuation.
D. future value interest factoring.
E. complex factoring.

A

C. discounted cash flow valuation.

36
Q

Which one of the following actions will increase the present value of an amount to be received sometime in the future?

A. Increase in the time until the amount is received
B. Increase in the discount rate
C. Decrease in the future value
D. Decrease in the interest rate
E. Decrease in both the future value and the number of time periods

A

D. Decrease in the interest rate

37
Q

What is the future value of $2,998 invested for 9 years at 5.2 percent compounded annually?
A. $7,303.87
B. $7,466.46
C. $4,731.22
D. $3,766.19
E. $3,777.09

A

C. $4,731.22

FV = $2,998 × 1.0529 = $4,731.22
in excel

=FV(0.052,9,,-2998)

38
Q

Retirement Investment Advisors, Incorporated, has just offered you an annual interest rate of 4.2 percent until you retire in 40 years. You believe that interest rates will increase over the next year and you would be offered 4.8 percent per year one year from today. If you plan to deposit $12,000 into the account either this year or next year, how much more will you have when you retire if you wait one year to make your deposit?

A. $2,986.28
B. $12,477.25
C. $15,244.05
D. $17,209.78
E. $18,380.07

A

B. $12,477.25

FV = $12,000 × 1.04240 = $62,214.27

FV = $12,000 × 1.04839 = $74,691.52

Difference = $74,691.52 − 62,214.27 = $12,477.25

39
Q

What is the present value of $12,900 to be received 2 years from today if the discount rate is 6 percent?
A. $10,195.06
B. $11,059.67
C. $12,169.81
D. $7,740.00
E. $11,480.95

A

E. $11,480.95

PV = $12,900/1.062 = $11,480.95

40
Q

Three years ago, you invested $2,900. Today, it is worth $3,700. What rate of interest did you earn?

A. 8.46 %
B. 4.63 %
C. 4.23 %
D. .71 %
E. 3.63 %

A

A. 8.46 %

FV = $3,700 = $2,900 × (1 + r)3

r = .0846, or 8.46%

use financial calculator
https://www.calculator.net/finance-calculator.html?ctype=returnrate&cyearsv=3&cinterestratev=6&cstartingprinciplev=-2%2C900&ccontributeamountv=0&ctargetamountv=3%2C700&cpy=1&ccy=1&ciadditionat1=end&printit=0&x=Calculate#cr

41
Q

Maxxie purchased a tract of land for $26,000. Today, the same land is worth $56,400. How many years have passed if the price of the land has increased at an annual rate of 6.6 percent?

A. 12.12 years
B. 10.39 years
C. 10.90 years
D. 10.77 years
E. 9.09 years

A

A. 12.12 years

$56,400 = $26,000(1.066)t

t = 12.12 years

in Excel

=NPER(0.066,,-26000,56400,1)

can use financial calculator
https://www.calculator.net/finance-calculator.html?ctype=investlength&cyearsv=3&cinterestratev=6.6&cstartingprinciplev=-26%2C000&ccontributeamountv=0&ctargetamountv=56%2C400&cpy=1&ccy=1&ciadditionat1=end&printit=0&x=Calculate#cr

42
Q

A single cash flow is also known as a:
A. level cash flow
B. terminal cash flow
C. lump sum
D. multiple cash flow

A

C. lump sum

43
Q

The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.

A. annuity
B. perpetuity
C. uneven
D. consol

A

C. uneven

44
Q

Interest paid twice a year is known as ______ compounding.

A. semiannual
B. biannual
C. monthly
D. weekly

A

A. semiannual

45
Q

For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ___________________
(smaller/larger) than the APR.

A

larger

46
Q

Given the same APR, more frequent compounding results in _____.
A. lower EARs
B. higher EARs
C. rounder EARs

A

B. higher EARs

47
Q

When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.

A. reduced
B. inflated
C. lump
D. stair-step

A

C. lump

48
Q

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

A

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

49
Q

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

A

A. The interest rate stated as though it were compounded once per year.

50
Q

A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.

A. uneven
B. infinite
C. level
D. random

A

C. level

51
Q

Semiannual compounding means that interest is paid ______ per year.

A. three times
B. twelve times
C. one time
D. two times

A

D. two times

52
Q

For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ______ the APR.

A. larger than
B. smaller than
C. equal to

A

A. larger than

53
Q

An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.

A. semiannually
B. quarterly
C. daily
D. continuously

A

A. Semiannually

Reason: For quarterly compounding, EAR=(1+0.07/4)4-1=7.19%. For semiannual compounding, EAR = (1 + 0.07/2)2 – 1 = 7.12%

54
Q

Which of the following is equal to an effective annual rate of 12.36 percent?
A. 12%, compounded annually
B. 12%, compounded monthly
C. 12% compounded semiannually
D. 12%, compounded quarterly

A

12%, compounded semiannually

Reason: For quarterly compounding, the EAR = (1+0.12/4)4 - 1= 12.55%. For 12% compounded semiannually,EAR = (1 + 0.12/2)2 -1 = 12.36%

55
Q

Which one of the following statements correctly defines a time value of money relationship?
A. Time and future values are inversely related, all else held constant.
B. Interest rates and time are positively related, all else held constant.
C. An increase in a positive discount rate increases the present value.
D. An increase in time increases the future value given a zero rate of interest.
E. Time and present value are inversely related, all else held constant.

A

E. Time and present value are inversely related, all else held constant.

56
Q

Which one of these statements related to growing annuities and perpetuities is correct?
A. You can compute the present value of a growing annuity but not a growing perpetuity.
B. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate.
C. The future value of an annuity will decrease if the growth rate is increased.
D. An increase in the rate of growth will decrease the present value of an annuity.
E. The present value of a growing perpetuity will decrease if the discount rate is increased.

A

E. The present value of a growing perpetuity will decrease if the discount rate is increased.

57
Q

An ordinary annuity is best defined as:
A. increasing payments paid for a definitive period of time.
B. increasing payments paid forever.
C. equal payments paid at the end of regular intervals over a stated time period.
D. equal payments paid at the beginning of regular intervals for a limited time period.
E. equal payments that occur at set intervals for an unlimited period of time.

A

C. equal payments paid at the end of regular intervals over a stated time period.

58
Q

A perpetuity is defined as:
A. a limited number of equal payments paid in even time increments.
B. payments of equal amounts that are paid irregularly but indefinitely.
C. varying amounts that are paid at even intervals forever.
D. unending equal payments paid at equal time intervals.
E. unending equal payments paid at either equal or unequal time intervals.

A

D. unending equal payments paid at equal time intervals.

59
Q

George Jefferson established a trust fund that will provide $221,500 per year in scholarships. The trust fund earns an annual return of 3.8 percent. How much money did Mr. Jefferson contribute to the fund assuming that only income is distributed?
A. $5,380,566.80
B. $5,100,328.95
C. $6,661,654.14
D. $5,828,947.37
E. $4,857,456.14

A

D. $5,828,947.37

PV = 221,500/.038

60
Q

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.
A. effective annual
B. annual percentage
C. periodic interest
D. compound interest
E. episodic interest

A

B. annual percentage

61
Q

Your credit card company charges you 1.45 percent per month. What is the APR on your credit card?
A. 19.80%
B. 17.40%
C. 18.86%
D. 16.53%
E. 18.13%

A

B. 17.40%

1.45x12

62
Q
  1. What is the effective annual rate for an APR of 12.00 percent compounded quarterly?
    A. 12.68%
    B. 12.62%
    C. 12.55%
    D. 13.18%
    E. 12.05%
A

C. 12.55%

In excel – =(1+(0.12/4))^4-1

63
Q

What is the future value of $3,700 PER YEAR for 30 years at an interest rate of 7.59 percent?
(the PER YEAR makes it an annuity)
A. $371,983.47
B. $358,018.23
C. $388,891.81
D. $375,481.75
E. $373,455.02

A

C. $388,891.81

FV of an annuity

=-3700 x ((1+.0759/1)^30-1)/.0759/1

I had to do each step in excel separately

64
Q

You just won the $48 million Ultimate Lotto jackpot. Your winnings will be paid as $2,400,000 per year for the next 20 years. If the appropriate interest rate is 5.7 percent, what is the value of your windfall?
A. $26,800,415.97
B. $28,210,964.18
C. $27,418,989.14
D. $29,818,989.14
E. $29,151,329.65

A

B. $28,210,964.18

PV of an annuity

PV=2,400,000[(1-(1/(1+.057)^20) /.057]

I had to do each step in excel separately

65
Q
A

FIN 325 (7 decks)

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