Exam 2 Review Flashcards
An ordinary annuity is best defined by which one of the following?
A. Increasing payments paid for a definitive period of time.
B. Equal payments that occur at set intervals for an unlimited period of time.
C. Increasing payments paid forever.
D. Equal payments paid at the beginning of regular intervals for a limited time period.
E. Equal payments paid at the end of regular intervals over a stated time period.
E
Which of these will increase the present value of an amount to be received sometime in the future?
A. Decrease in both the future value and the number of time periods.
B. Decrease in the future value.
C. Increase in the time until the amount is received.
D. Decrease in the interest rate.
E. Increase in the discount rate.
D
Which one of the following statements correctly defines a time value of money relationship?
A. An increase in time increases the future value given a zero rate of interest.
B. Time and future values are inversely related, all else held constant.
C. An increase in a positive discount rate increases the present value.
D. Interest rates and time are positively related, all else held constant.
E. Time and present value are inversely related, all else held constant.
E
You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.
A. Interest-only loan.
B. Balloon loan where 50 percent of the principal is repaid as a balloon payment.
C. Amortized loan with equal principal payments.
D. Discount loan.
E. Amortized loan with equal loan payments.
E
Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now?
A. Increases.
B. Cannot be determined from the information provided.
C. Becomes negative.
D. Remains constant.
E. Decreases.
A
Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true?
A. Samantha is earning simple interest on her savings.
B. Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.
C. Samantha deposited more than $5,000 this morning.
D. The present value of Samantha’s account is $5,000.
E. Samantha could earn more interest on this account if she withdrew her interest earnings each year.
B
Phillippe invested $1,000 ten years ago and expected to have $1,800 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?
A. He ignored the Rule of 72 which caused his account to decrease in value.
B. He earned simple interest rather than compound interest.
C. He earned a lower interest rate than he expected.
D. The future value interest factor turned out to be higher than he expected.
E. He did not earn any interest on interest as he expected.
C
