# Finance 303 Ch5

 Payments of \$100 a month for 24 months are defined as a a, perpetuityb,annuityc,consold, ordinary cash flow e, discounted cash flow b, annuity A series of equal cash flows that occur at the beginning of each time period for a limited number of time periods is called a a, ordinary annuityb,beginning annuityc, annuity dued,perpetuitye, perpetuity due c, annuity due A series unending cash flows of equal amount that occur at equal intervals of time is called a: a,ordinary annuityb,annuity duec,absolute annuityd,perpetuitye, perpetuity due d, perpetuity In Canada and the United Kingdom, a perpetuity is also called a a, consulb, infinite bondc, infinite flowd, dowrye, forever bond a, consul The stated interest rate is the interest rate expressed: a, as if it were compounded one time per year b, as the quoted rate compounded by 12 periods per year c, in terms of the rate changed per day d, in terms of the interest payment made each periode, in terms of an effective rate d, in terms of the interest payment made each period The effective annual rate is defined as the interest rate that is:a, stated in terms of a rate per dayb, equal to a monthly rate multiplied by twelvec,expressed as simple interest d,computed by multiplying the rate per period by the number of periods per year e, expressed as if it were compounded once per year e, expressed as if it were compounded once per year The interest rate per period multiplied bt the number of periods in a year is called:a, annual percentage rate b, compounded ratec, effective annual rate d,perpetual rate e,simple rate a, annual percentage rate The future value of a series of cash flows over time can be compute by: a, computing the future value of the middle cash flow and multiplying that amount by the number of cash flowsb, summing the amount of each of the individual cash flows and multiplying the summation by (1 + r)t, where t equals the total number of cash flowsc,summing the future values of each of the individual cash flowsd,discounting each of the individual cash flows and summing the resultse, multiplying each individual cash flow by (1 + r) and summing the results c, summing the future values of each of the individual cash flows which of the following statement is correct?a, the future value of an annuity increases when the interest rate decreases b, the present value of an annuity increases when the interest rate increasesc, the present value of an annuity is unaffected by the number of the annuity paymentsd,the future value of an annuity is unaffected by the amount of each annuity payment e,The present value of an annuity increases when the interest rate decreases … The payment key on a financial calculator generally refers to the a, present valueb, future valuec, frequency of each annuity paymentd,amount of each annuity cash flowe,number of payments in an annuity stream d, amount of each annuity cash flow which of the following factors are considered when computing the future value of an annuity?i, timing of each cash flowii, amount of each cash flowiii, discount rateiv,number of cash flows i, ii, iii, iv what is the annuity present value formula? C x {{1-[1/(1+r)t]}/r} which of one of the following is a perpetuity?a,car payments of \$260 a month for 60 months b,social security payments of \$1,100 a month for lifec,student loan payments of \$360 a month for five years d,\$1,000 annual payments from a trust fund forever e,\$680 a month over the life of a lease d,\$1,000 annual payments from a trust fund forever Which one of the following is an annuity, but not a perpetuity? a,unequal payments each month for 18 months b,payments of equal amount each quarter forever c,unequal payments each year forever d,equal payments every six months for 48 months e,unending equal payments every other month d,equal payments every six months for 48 months Which one of the following statements concerning annuities is correct?a,The present value of an annuity is equal to the annuity amount multiplied by the number of annuity payments. b,An annuity due has payments that occur at the beginning of each time period. c,The future value of an annuity decreases as the interest rate increases. d,If unspecified, you should assume an annuity is an annuity due. e,An annuity is an unending stream of equal payments occurring at equal intervals of time. b,An annuity due has payments that occur at the beginning of each time period Which of the following are generally structured as annuity payments?I. weekly grocery bill II. repayment of auto loan III. car repairs IV. monthly rent ii and iv Which one of the following is the present value of a perpetuity formula annuity?a,C (Future value factor 1) / r b,C (Future value factor + 1) / r c,C / (Future value factor 1) + r d,C / r e,r / C d, C/r The present value of an annuity will decrease when either the:a,interest rate increases or the number of periods increases. b,interest rate increases or the amount of the annuity payment increases. c,interest rate declines or the amount of the annuity payment increases. d,number of periods increases or the interest rate decreases. e,amount of the annuity payment decreases or the interest rate increases. e,amount of the annuity payment decreases or the interest rate increases. You are comparing two investments, both of which provide annuity payments in exchange for a lump sum investment today. Each annuity is for a period of 25 years and each pays \$500 a month. You require a 7 percent return on these investments. Annuity A pays at the beginning of each month and annuity B pays at the end of each month. Given this information, which one of the following statements is correct?a,Both annuities are equally valuable today. b,Annuity B is worth more today because of the timing of its cash flows. c,Annuity A is worth more today because you will receive 25 payments whereas Annuity B only pays 24 payments. d,Annuity A has a higher present value and a lower future value than annuity B. e,Annuity A has both a higher present value and a higher future value than annuity B. e,Annuity A has both a higher present value and a higher future value than annuity B. The difference between an ordinary annuity and an annuity due is the: number of annuity payments. amount of each annuity payment. frequency of the annuity payments. interest rate applied to the annuity payments. timing of the annuity payments. timing of the annuity payments Which one of the following is an ordinary annuity, but not a perpetuity?\$75 paid at the beginning of each monthly period for one year \$125 paid at the end of each monthly period for an infinite period of time \$430 paid at the beginning of every quarter for five years, starting today \$550 paid every year for ten years, starting today \$110 paid weekly for one year, starting one week from today \$110 paid weekly for one year, starting one week from today Which of the following can be calculated? I. future value of an ordinary annuity II. future value of a perpetuity III. present value of a perpetuity IV. present value of an annuity due I, III, IV hich one of the following is correct? AnswerAnnuity FVt = C / [(1 + r)t 1] / r Annuity FV factor = [(1 + r) t + 1] / r Annuity due value = Ordinary annuity value (1 + r) Perpetuity FV = C / r FV = PV (1 + t)r Annuity due value = Ordinary annuity value (1 + r) Which one of the following has the lowest effective annual rate?7 percent compounded annually 7 percent compounded semi-annually 7 percent compounded quarterly 7 percent compounded monthly 7 percent compounded daily … When comparing loans of equal amounts and equal time periods, you should select the loan that has the lowest:annual percentage rate. stated rate. nominal rate. effective annual rate. quoted rate. effective annual rate A credit card has an APR of 14.9 percent and charges interest monthly. The effective annual rate on this account:will be less than 14.9 percent. can either be less than or equal to 14.9 percent. will equal 14.9 percent. can either be greater than or equal to 14.9 percent. will be greater than 14.9 percent. will be greater than 14.9 percent. Which one of the following statements is correct concerning annual percentage rates (APRs)?The APR is equal to the EAR for a loan that chargesinterest monthly. The APR is equal to the monthly interest rate multiplied by 12. The APR is equal to one plus the monthly interest rate raised to the 12th power. The APR is the best measure of the actual rate you are paying on a loan. When comparing investments, you should compare the quoted rates, not the APRs. The APR is equal to the monthly interest rate multiplied by 12. You are comparing two savings accounts. Account A has an APR of 4.65 percent and an EAR of 4.75 percent. Account B has an APR of 4.70 percent and an EAR of 4.70 percent. Given this, you should invest in account: A because it has the lower APR. A because it has the higher EAR. B because it has the higher APR. B because it has the lower EAR. B because its APR is equal to its EAR. A because it has the higher EAR. Scott borrowed \$1,800 today. The loan agreement requires him to repay \$2,120 in one lump sum payment one year from now. This type of loan is referred to as a(n): interest-only loan. pure discount loan. quoted rate loan. simple interest loan. amortized loan. pure discount loan. Which type of loan is comparable to the present value of a future lump sum?effective annual rate amortized interest-only annual percentage pure discount pure discount Sonny borrowed \$5,500 four years ago at an annual interest rate of 10 percent. The loan term is 7 years. Since he borrowed the money, Sonny has been making annual payments of \$550 to the bank. Which type of loan does Sonny have?nterest-only pure discount compounded amortized complex interest-only Sue borrowed \$5,000 from her bank 3 years ago. The loan term is 5 years. Each year, Sue must repay the bank \$1,000 plus the annual interest. Which type of loan does Sue have? amortized blended discount interest-only pure discount complex amortized Roger just financed some new furniture through his credit union. His loan requires payments of \$185 a month for 3 years. Assuming that all payments are paid timely, his last payment will pay off the loan in full. What type of loan does Roger have? amortized perpetual pure discount lump sum interest-only amortized Hallie borrowed \$4,500 from her bank and agreed to pay the interest on an annual basis and the principal at the end of 4 years. What type of loan does Hallie have? interest-only amortized perpetual pure discount lump sum interest only The Anderson Co. wants to borrow \$5,000 at the beginning of each year for six years at 7 percent interest. The firm will repay this money in one lump sum at the end of year 6. How much of the firm’s loan repayment is due to the \$5,000 it received in year 4?\$5,000.00 \$5,724.50 \$6,125.22 \$6,553.98 \$7,503.65 …
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