Conceptual quiz topic 1 review part #1 Flashcards
The _________ the discount rate, the ________ the present value of a future cash flow?
a. higher, lower.
b. higher, higher.
c. lower, lower.
d. longer, shorter
a. higher, lower
While the concept of compounding is generally associated with ________, discounting is associated with _________.
a. present value; future value.
b. future value; present value.
c. periodic payments; present value.
d. annuities; dividing.
B
A loan that requires equal payments over its term to maturity to pay off the loan is called a(n):
a. amortized loan.
b. defaulted loan.
c. payments loan.
d. present value loan.
a. amortized loan
- Which one of these statements related to growing annuities and perpetuities is correct?
A. The cash flow used in the growing annuity formula is the initial cash flow at time zero.
B. Growth rates cannot be applied to perpetuities if you wish to compute the present value.
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.
E. Present value of growing perpetuity = Cash flows in year 1/(Discount rate – growth rate)
Which one of the following statements related to loan interest rates is correct?
A) the annual percentage rate considers the compounding of interest
B) when comparing loans you should compare the effective annual rates.
C) Lenders are most apt to quote the effective annual rate.
D) the more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.
B) when comparing loans you should compare the effective annual rates.
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
C) effective annual
You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?
Annuity B has a smaller present value than annuity A.
- A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.
A. amortized
B. continuous
C. balloon
D. pure discount
E. interest-only
D. pure discount
- Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?
A. remains constant
B. increases
C. decreases
D. becomes negative
E. cannot be determined from the information provided
C. decreases
Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?
A. current yield
B. effective rate
C. compound rate
D. simple rate
E. discount rate
E. discount rate
You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner.
A. I only
B. II only
C. I and III only
D. I and IV only
E. II and III only
C. I and III only
