module 6/7 Flashcards
1
Q
- Which of the following statements is incorrect?
A. Interest-on-interest is interest earned on the reinvestment of previous interest payments.
B. Simple interest is interest earned only in the first year of an investment.
C. All else equal, the higher the interest rate, the higher the future value of an investment will be.
D. All else equal, the present value increases as the interest rate decreases.
E. Compound interest is interest earned on both the initial principal and the interest reinvested
from prior periods.
F. None of the above is the single best answer
A
B
2
Q
- All else equal, the present value ___________ as the period of time decreases.
A. increases
B. decreases
C. remains constant
D. None of the above is the single best answer.
A
A
3
Q
- Ron calculates the present value of a bonus he will receive next year. ____________ is the name
for the process he uses.
A. Growth analysis
B. Discounting
C. Accumulating
D. Compounding
E. Reducing
F. None of the above is the single best answer.
A
B
4
Q
- The annual percentage yield (APY) is equal to the annual percentage rate (APR) when _______.
Select one or more correct answers.
A. interest compounds continuously
B. interest compounds daily
C. interest compounds annually
D. interest compounds monthly
E. interest compounds quarterly
F. None of the above is the single best answer
A
C
5
Q
- Minerva plans to open a new bank account and calls several banks to find out where she can
earn the most interest on her money. After talking with several banks, Minerva has five options.
Which bank account should she choose to earn the highest return on her money?
A. 8% APR compounded daily
B. 8.25% APR compounded quarterly
C. 8.4% APR compounded annually
D. 8.15% APR compounded semi-annually
E. 8% APR compounded monthly
F. You cannot determine the answer without additional information
A
B
6
Q
- Consider two investment opportunities, a Peeves bond and a Filch bond. The Peeves bond pays
interest at the rate of 12% per year, compounded monthly. The Filch bond pays interest at the rate
of 11.5% per year, compounded daily. Which investment provides a better return?
A. The Peeves bond
B. The Filch bond
C. They are equivalent, so you would be indifferent
D. You cannot determine the answer without additional information
A
A
7
Q
- Which of the following statements are false? Only select “None of these statements are false.” if
you believe all the other statements are true.
A. An investment whose internal rate of return (IRR) is less than the cost of funds to borrow is
a profitable investment.
B. Net present value (NPV) and internal rate of return (IRR) are two decision-making tools used
by financial managers to evaluate the best long-term investments for a firm.
C. The nominal rate of interest includes our desired real rate of return plus an adjustment for
expected inflation.
D. The internal rate of return (IRR) is the discount rate that makes the net present value of all
cash flows (both positive and negative) from a particular investment equal to zero.
E. The Fisher Equation states that the real rate of interest is approximately equal to the nominal
rate of interest plus the inflation rate.
F. None of the statements are false
A
A,E
8
Q
- Molly invests $12,000 for fifteen years at a 7 percent rate of interest compounded annually. The
dollar amount of interest she receives each year will _____________.
A. increase B. decrease C. remain constant
D. You cannot determine the answer without additional information
A
A
9
Q
- Which of the following statements concerning interest rates are correct? Assume all else is
equal.
A. Savers would prefer annual compounding over monthly compounding.
B. The APY increases as the number of compounding periods per year increases.
C. The APY equals the APR when interest compounds annually.
D. Borrowers would prefer monthly compounding over annual compounding.
E. The APR ignores interest-on-interest.
F. The APY captures only the simple interest.
G. None of these statements is correct
A
B,C,E
10
Q
- Which one of the following compounding periods will yield the smallest present value given a
stated future value and annual percentage rate?
A. annual
B. semi-annual
C. monthly
D. daily
E. continuous
F. None of the above is the single best answer
A
E
11
Q
- Dudley is offered two different loans to buy his first home. Loan A offers 4.62% APR
compounded quarterly. Loan B offers 4.62% APR compounded annually. Which loan should Dudley
choose and why?
A. Loan A because she will pay eight fewer basis points in interest-on-interest.
B. Loan B because she will pay eight fewer basis points in interest-on-interest.
C. Loan A because she will pay twelve fewer basis points in interest-on-interest.
D. Loan B because she will pay twelve fewer basis points in interest-on-interest.
E. Loan A because she will pay fourteen fewer basis points in simple interest.
F. Loan B because she will pay fourteen fewer basis points in simple interest.
G. None of the above is the single best answer
A
B
12
Q
- Which one of the following terms is used to describe a loan wherein each payment is equal in
amount and includes both interest and principal?
A. interest-only loan
B. modified loan
C. balloon loan
D. pure discount loan
E. amortized loan
F. None of the above is the single best answer
A
E
13
Q
- Which one of the following statements correctly states a relationship, all else held constant?
A. Time and future values are inversely related.
B. Interest rates and time are positively related.
C. An increase in the discount rate increases the present value, given positive rates.
D. An increase in time increases the future value given a zero rate of interest.
E. Time and present value are inversely related.
F. None of the above is the single best answer
A
E
14
Q
- You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay
1.75% per quarter. Annuity A will pay you on the first day of each quarter while annuity B will pay you
on the last day of each quarter. Which of the following statements are correct concerning these two
annuities?
A. These two annuities have equal present values but unequal future values at the end of year five.
B. These two annuities have equal present values as of today and equal future values at the end
of year five.
C. Annuity B is an ordinary annuity.
D. Annuity A is an annuity due.
E. Annuity A has a smaller future value than annuity B.
F. Annuity B has a smaller present value than annuity A.
G. None of the above is the single best answer
A
C,D,F
15
Q
- You are comparing two investment options that each pay 5% APY. Both options will provide you with
$12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by
two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of
the following statements is correct given these two investment options?
A. Both options are of equal value given that they both provide $12,000 of income.
B. Option A has the higher future value at the end of year three.
C. Option B has a higher present value at time zero than does option A.
D. Option B is an amortized loan.
E. Option A is an annuity.
F. None of the above is the single best answer
A
C
