chapter 5 quiz

Question 1

A stream of equal cash payments lasting forever is termed as:
A. an annuity.
B. an annuity due.
C. an installment plan.
D. a perpetuity

Answer 1

D. a perpetuity

Question 2

How many monthly payments remain to be paid on an 8% compounded monthly mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the $100,000 mortgage?
A. approximately 268 payments
B. approximately 180 payments
C. approximately 91 payments
D. approximately 68 payments

Answer 2

B. approximately 180 payments

Question 3

Real interest rates:
A. always exceed inflation rates.
B. can decline to zero but no lower.
C. can be negative, zero, or positive.
D. traditionally exceed nominal rates.

Answer 3

C. can be negative, zero, or positive

Question 4

Which one of the following will increase the present value of an annuity, other things equal?
A. increasing the interest rate
B. decreasing the interest rate
C. decreasing the number of payments
D. decreasing the amount of the payment

Answer 4

A. increasing the interest rate

Question 5

An interest rate that has been annualized using compound interest is termed the:
A. simple interest rate.
B. annual percentage rate.
C. discounted interest rate.
D. effective annual interest rate

Answer 5

D. effective annual interest rate

Question 6

. If interest is paid m times per year, then the per-period interest rate equals the:
A. effective annual rate divided by m.
B. compound interest rate times m.
C. effective annual rate.
D. annual percentage rate divided by m

Answer 6

A. effective annual rate divided by m

Question 7

. Cash flows occurring in different periods should not be compared unless:
A. interest rates are expected to be stable.
B. the flows occur no more than one year from each other.
C. high rates of interest can be earned on the flows.
D. the flows have been discounted to a common date.

Answer 7

D. the flows have been discounted to a common date

Question 8

Other things being equal, the more frequent the compounding period, the:
A. higher the annual percentage rate.
B. lower the annual percentage rate.
C. higher the effective annual interest rate.
D. lower the effective annual interest rate.

Answer 8

C. higher the effective annual interest rate

Question 9

Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, then over his career his purchasing power:
A. remained on par with inflation.
B. increased by nearly 1% annually.
C. increased by nearly 2% annually.
D. decreased.

Answer 9

C. increased by nearly 2% annually

Question 10

What factor is fixed if you establish a scholarship fund in perpetuity?
A. present value
B. payment amount
C. interest rate
D. discount rate

Answer 10

B. payment amount

Question 11

The concept of compound interest refers to:
A. earning interest on the original investment.
B. payment of interest on previously earned interest.
C. investing for a multiyear period of time.
D. determining the APR of the investment

Answer 11

B. payment of interest on previously earned interest

Question 12

Assume you are making $989 monthly payments on your amortized mortgage. The amount of each payment that is applied to the principal balance:
A. decreases with each succeeding payment.
B. increases with each succeeding payment.
C. is constant throughout the loan term.
D. fluctuates monthly with changes in market interest rates

Answer 12

A. decreased with each succeeding payment

Question 13

Given a set future value, which of the following will contribute to a lower present value?
A. higher discount rate
B. fewer time periods
C. less frequent discounting
D. lower discount factor

Answer 13

A. higher discount rate

Question 14

The present value of a perpetuity can be determined by:
A. multiplying the payment by the interest rate.
B. dividing the interest rate by the payment.
C. multiplying the payment by the number of payments to be made.
D. dividing the payment by the interest rate.

Answer 14

D. dividing the payment by the interest rate

Question 15

A cash-strapped young professional offers to buy your car with four, equal end of year annual payments of $3,000, beginning 2 years from today (the first payment will be made on the last day of year 2). Assuming you’re indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept?
A. Yes; present value is $9,510.08
B. Yes; present value is $11,372.67
C. No; present value is $8,645.09
D. No; present value is $7,461.17

Answer 15

A. Yes; present value is $9,510.08

Question 16

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?
A. the APR is lower than the annually compounded rate.
B. the APR is higher than the annually compounded rate.
C. the APR equals the annually compounded rate.
D. the answer depends on the interest rate.

Answer 16

A. the APR is lower than the annually compounded rate

Question 17

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?
A. the interest rate is very high.
B. the investment period is very long.
C. the compounding is annually.
D. this is not possible with positive interest rates.

Answer 17

D. this is not pssobile with positive interest rates

Question 18

Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with semiannual compounding?
A. 8.0% with monthly compounding
B. 8.5% with semiannual compounding
C. The depositor would be indifferent.
D. The time period must be known to select the preferred account.

Answer 18

B. 8.5% with semiannual compounding

Question 19

When an investment pays only simple interest, this means:
A. the interest rate is lower than on comparable investments.
B. the future value of the investment will be low.
C. the earned interest is nontaxable to the investor.
D. interest is earned only on the original investment.

Answer 19

D. interest is earned only on the original investment

Question 20

The APR on a loan must be equal to the effective annual rate when:
A. compounding occurs monthly.
B. compounding occurs annually.
C. the loan is for less than one year.
D. the loan is for more than one year.

Answer 20

B. compounding occurs annually