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Finance > Chapter 6 SmartBook > Flashcards

Chapter 6 SmartBook Flashcards

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1
Q

Most investments involve _____ cash flows.

A

Multiple

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2
Q

A single cash flow is also known as a:

A

Lump Sum

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3
Q

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

  1. Find the future value of a single lump sum amount
  2. Calculate the future value of each cash flow first and then add them up
  3. Compound the accumulated balance forward one year at a time
  4. Discount all of the cash flows back to Year 0
A

2 and 3

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4
Q

The present value of a series of future cash flows is the amount you would need today to _____.

A

Exactly duplicate those future cash flows

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5
Q

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

A

end

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6
Q

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

A

Outflow/Inflow

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7
Q

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

A

present

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8
Q

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

A

lump

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9
Q

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

A. [1 − (1/1.1030)]/.20]

B. [1 − (1/1.2030)]/.10]

C. [1 − (1/1.1030)]/.10]

D. [1 − (1.1/1.1030)]/.10]

A

C.

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10
Q

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

A

One year

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11
Q

How frequently does continuous compounding occur?

A

Every instant

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12
Q

The present value of a series of _______ cash flows is the amount you would need today to exactly duplicate those future cash flows.

A

future

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13
Q

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

A. Mortgages

B. Common stock dividends

C. Pensions

A

A and C

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14
Q

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.

A

end

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15
Q

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/)

A

Annuity

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16
Q

The formula for the present value interest factor for annuities is:

Annuity present value factor = {1–[1/(1+r)t]}r.

True false question.
True
False

A

True

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17
Q

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

A. [1.08 − (1/1.0820)]/.08

B. [1 − (1/1.0820)]/.08

C. [1 − (1/1.1820)]/.08

D. [1 − (1/1.0820)]/1.08

A

B

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18
Q

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?

A

$100{[1 − (1/(1.10)3)]/0.10}

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19
Q

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

A

Annual

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20
Q

To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ______, and multiply that by ______.

A

3.7908; $100

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21
Q

Which of the following are annuities?

A. Tips to a waiter

B. Monthly grocery bill

C. Monthly rent payments in a lease

D. Installment loan payments

A

C and D

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22
Q

When using the spreadsheet (Excel) function for finding the PV of an annuity, it’s a good idea to enter the ______ as a negative value.

A

payment

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23
Q

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?

A

$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.

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24
Q

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

A

FV = C((1+r)t−1r)

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25
Q

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

A

Present

26
Q

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

A

at the beginning of each period

27
Q

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?

A

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

28
Q

Which of the following should be valued using a perpetuity formula?

A. An amortized loan with a set amount over a period of time

B. Cash flows from a product whose sales are expected to remain constant forever

C. A consol (bond that pays interest only and does not mature)

D. Preferred stock

A

B, C and D

29
Q

To use a present value of an annuity table to find the present value of an annuity factor, search the ______ for the number of periods and the ______ for the rate.

A

Row, Column

30
Q

A growing annuity has a(n) ____.

A

finite number of growing cash flows

31
Q

Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?

A

=PV(.10,10,-100,0,)

32
Q

Because of __________ and _________, interest rates are often quoted in many different ways.

A

Tradition, legislation

33
Q

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.

A

Annuity

34
Q

Semiannual compounding means that interest is paid ______ per year.

A

two times

35
Q

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

A

Due

36
Q

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

A

Infinite

37
Q

The APR is also called the Blank______ rate and it differs from the EAR.

A

Stated

38
Q

Which of the following is true about a growing annuity?

A. The cash flows grow for a finite period.

B. The cash flows grow for an infinite period.

C. The cash flows grow at an irregular rate.

D. The cash flows grow at a constant rate.

A

A and D

39
Q

There is only one way to quote interest rates.

True
False

A

F

40
Q

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

A

Semiannually

41
Q

Interest paid twice a year is known as ______ compounding.

A

Semiannual

42
Q

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

A

annual

43
Q

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%?

A

$5,000/1.03

44
Q

The APR is always the same as the EAR.

True false question.
True
False

A

F

45
Q

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

A

repaid at some point in the future

46
Q

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

A

principal

47
Q

Given the same APR, more frequent compounding results in _____.

A

higher EARs

48
Q

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.

A
49
Q

Which of the following is the simplest form of loan?

A

a pure discount loan

50
Q

Which of the following are ways to amortize a loan?

A. Pay only interest every period and pay the principal off at maturity

B. Pay both interest and principal in one lump sum at maturity

C. Pay principal and interest every period in a fixed payment.

D. Pay the interest each period plus some fixed amount of the principal.

A

C and D

51
Q

A fixed payment loan is most common for consumers.

True false question.
True
False

A

t

52
Q

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

A

amortization

53
Q

Which of the following are true about the amortization of a fixed payment loan?

Multiple select question.

The amount of interest and principal paid increases each period.

The amount of interest paid decreases each period.

The principal amount paid increases each period.

The payment amount decreases each period.

A

B and C

54
Q

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

A

Partial

55
Q

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

A

Annual

56
Q

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

A

partial

57
Q

Which of the following payment methods amortizes a loan?

Single lump sum payment

Interest plus fixed amount

Fixed payments that result in a zero loan balance

Fixed interest payments only

A

B and C

58
Q

Which type of amortization is most commonly used in the real world for mortgages and car loans?

A

Fixed Payment

59
Q

With a fixed payment loan, the amount of interest paid _____
(decreases/increases) each period.

A

decreases

60
Q

Which of the following are true about a partial amortization loan?

Multiple select question.

The amortization period is longer than the loan period.

The amortization period is shorter than the loan period.

The borrower makes a large balloon payment at the end of the loan period.

The monthly payment is based on a longer amortization period than the maturity of the loan.

The monthly payments do not fully pay off the loan by the end of the loan period.

A

A, C, D and E

61
Q

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

A

payments are mostly interest

62
Q
A

Finance (7 decks)

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