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Which of the following processes can be used to calculate future value for multiple cash flows?
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When calculating the present value of multiple cash flows using a spreadsheet, you must:
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| Question | Answer |
|---|---|
| Which of the following processes can be used to calculate future value for multiple cash flows? | Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up |
| When calculating the present value of multiple cash flows using a spreadsheet, you must: | calculate the present value of each cash flow then add the discounted values together |
| In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period. | end |
| The formula for the ______ value interest factor of an annuity is {1–[1/(1+r)t]r} . | present |
| A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) for many years. | Blank 1: outflow, outlay, out lay, out flow, outflows, or outlays Blank 2: inflows, inflow, in flows, or in flow |
| One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. | one year |
| When calculating the future value of multiple cash flows using a spreadsheet, you must: | calculate the future value of each cash flow then add the compounded values together. |
| 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. | END |
| The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______. | [1 − (1/1.1030)]/.10] |
| TRUE OR FALSE The formula for the present value interest factor for annuities is: Annuity present value factor = {1–[1/(1+r)t]}r . | TRUE |
| Which compounding interval will result in the lowest future value assuming everything else is held constant? | Annual |
| Most investments involve _____ cash flows. | multiple |
| Which of the following are annuities? | Installment loan payments Monthly rent payments in a lease |
| 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? | 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. |
| The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____. | [1 − (1/1.0820)]/.08 |
| How frequently does continuous compounding occur? | Every instant |
| 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? | $100{[1 − (1/(1.10)3)]/0.10} |
| Which of the following are real-world examples of annuities? | Mortgages Pensions |
| 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. | payment |
| Which of the following is the formula for the future value of an annuity? | FV = C((1+r)t−1r) |
| 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/) | ANNUITY |
| An annuity due is a series of payments that are made ____. | at the beginning of each period |
| 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? | $100{[1 - (1/(1.10)20)]/0.10} |
| A perpetuity is a constant stream of cash flows for a(n) ______ period of time. | infinite |
| 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? | =PV(.10,10,-100,0,) |
| 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. | annuity |
| Which of the following is true about a growing annuity | The cash flows grow for a finite period. The cash flows grow at a constant rate. |
| Which of the following should be valued using a perpetuity formula? | Cash flows from a product whose sales are expected to remain constant forever A consol (bond that pays interest only and does not mature) Preferred stock |
| Because of __________ and _________, interest rates are often quoted in many different ways | tradition; legislation |
| An effective annual rate of 7.12 percent is equal to 7 percent compounded ______. | semiannually |
| The Blank 1 percentage rate is the interest rate charged per period multiplied by the number of periods in a year. | ANNUAL |
| The APR is also called the Blank______ rate and it differs from the EAR. | stated |
| Which of the following is the simplest form of loan? | A pure discount loan |
| Which of the following is equal to an effective annual rate of 12.36 percent? | 12%, compounded semiannually |
| 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. |
| The original loan amount is called the _____. | principal |
| Amortization is the process of paying off loans by regularly reducing the _________. | principal |
| 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%? | $5,000/1.03 |
| With interest-only loans that are not perpetuities, the entire principal is _____. | repaid at some point in the future |
| Which of the following are ways to amortize a loan? | Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal. |
| Which of the following is equal to an effective annual rate of 12.36 percent? | Reason: For annual compounding, the EAR is equal to the APR. For 12% compounded semiannually, EAR = (1 + 0.12/2)2 -1 = 12.36% |
| Versus a similar fixed payment loan, the total interest on a fixed Blank loan is less. | principal |
| Which of the following are true about a partial amortization loan? | The monthly payment is based on a longer amortization period than the maturity of the loan. The amortization period is longer than the loan period.The borrower makes a large balloon payment at the end of the loan period. The monthly payments do not full |
| The loan balance on Blank amortization loans declines so slowly | PARTIAL |
| The most common way to repay a loan is to pay: | interest plus a fixed principal amount every period. |
| In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years. | 2 to 30 |
| Which of the following are true about the amortization of a fixed payment loan? | The amount of interest paid decreases each period. The principal amount paid increases each period. |
| Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is | less. |
| The payments in a Blank______ amortization loan are NOT based on the life of the loan. | partial |
| The loan balance on partial amortization loans declines so slowly because the ___ | payments are mostly interest |
| When the term structure of interest rates is downward sloping, ___ | short-term rates are higher than long-term rates |
| The U.S. government borrows money by issuing: | Treasury bills Treasury notes Treasury bonds |
| Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then: | paid off in a lump sum bullet payment. |
| Which three of the following are common shapes for the term structure of interest rates? | Upward sloping Downward sloping Humped |
| Which of the following are true about a partial amortization loan? | The monthly payments do not fully pay off the loan by the end of the loan period. The borrower makes a large balloon payment at the end of the loan period. |
| Which of the following are true about a partial amortization loan? | The monthly payment is based on a longer amortization period than the maturity of the loan. The amortization period is longer than the loan period. |
| If the term structure of interest rates is upward sloping, then ____. | long-term rates are higher than short-term rates |
| The payments in a Blank______ amortization loan are NOT based on the life of the loan. | partial |
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agordon93