Chapter 05 Test Bank – Static Key
1.
Compound interest pays interest for each time period on the original investment plus the accumulated interest.
2.
When money is invested at compound interest, the growth rate is the interest rate.
3.
For a given amount, the lower the discount rate, the less the present value.
4.
Present values decline as the time to the cash flows increases.
5.
The present value of an annuity due equals the present value of an ordinary annuity times the discount rate.
6.
A perpetuity is a special form of an annuity.
7.
An annuity factor represents the future value of $1 that is deposited today.
8.
With a fixed-rate mortgage, the proportion of each payment used to pay interest on the loan declines over time.
9.
Converting an annuity to an annuity due decreases the present value.
10.
It is important to discount both real and nominal cash flows at the real interest rate.
11.
The term “constant dollars” refers to equal payments for amortizing a loan.
12.
Nominal dollars refer to their purchasing power.
13.
When inflation is positive, the nominal interest rate is larger than the real rate.
14.
The effective annual interest rate cannot be less than the annual percentage rate.
15.
The more frequent the compounding, the higher the future value, other things equal.
16.
An annual percentage rate (APR) is determined by annualizing the rate using compound interest.
17.
A dollar tomorrow is worth more than a dollar today.
18.
To calculate present value, we discount the future value by some interest rate r, the discount rate.
19.
The discount factor is used to calculate the present value of $1 received in year t.
20.
You should never compare cash flows occurring at different times without first discounting them to a common date.
21.
Present values can always be calculated by dividing the cash flow by a discount factor.
22.
The five-year discount factor is less than the four-year discount factor.
23.
As long as the interest rate is positive, the future value will always be larger than the present value given any period of time.
24.
An annuity due must have a present value at least as large as an equivalent ordinary annuity.
25.
Any sequence of equally spaced, level cash flows is called an annuity. An annuity is also known as a perpetuity.
26.
A mortgage loan is an example of an amortizing loan. “Amortizing” means that part of the monthly payment is used to pay
interest on the loan and part is used to reduce the amount of the loan.
27.
What is the future value of $10,000 on deposit for 2 years at 6% simple interest?
28.
If the five-year discount factor is d, what is the present value of $1 received in five years’ time?
29.
How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?
30.
How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just
credited to the account for interest?
31.
The concept of compound interest refers to:
32.
If interest is compounded semi-annually rather than annually, then:
33.
Assume the total expense for your current year in college equals $20,000. How much would your parents have needed to
invest 21 years ago in an account paying 8% compounded annually to cover this amount?
34.
An investment offers to pay $100 a year forever starting at the end of year 6. If the interest rate is 8%, what is the
investment’s value today?
35.
An investment of $100 pays interest of 2.5% per quarter. What will be the value of this investment at the end of 3 years?
36.
A car’s price is currently $20,000 and is expected to rise by 4% a year. If the interest rate is 6%, how much do you need to
put aside today to buy the car one year from now?
37.
If the 5-year discount factor is 0.7008, what is the interest rate?
38.
Given the future value, which of the following will contribute to a lower present value?
39.
Cash flows occurring in different periods should not be compared unless:
40.
What will be the approximate population of the United States, if its current population of 300 million grows at a compound
rate of 2% annually for 25 years?
41.
If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise
similar to the annuity due, what is the implied discount rate?
42.
A furniture store is offering free credit on purchases over $1,000. You observe that a big-screen television can be purchased
for nothing down and $4,000 due in one year. The store next door offers an identical television for $3,650 but does not offer
credit terms. Which statement below best describes the cost of the “free” credit?
43.
How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the first payment 1 year
from today, at an interest rate of 12%?
44.
The salesperson offers, “Buy this new car for $25,000 cash or, with an appropriate down payment, pay $500 per month for
48 months at 8% interest.” Assuming that the salesperson does not offer a free lunch, calculate the “appropriate” down
payment.
45.
What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at
the end of year 2, and $3,000 at the end of year 3?
46.
You invested $1,200 three years ago. During the three years, you earned annual rates of return of 4.8%, 9.2%, and 11.6%.
What is the value of this investment today?
47.
You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and $6,000 at end of year
5. What is the present value of these cash flows at an interest rate of 7%?
48.
Someone offers to buy your car for four, equal annual payments, beginning 2 years from today. If you think that the present
value of your car is $9,000 and the interest rate is 10%, what is the minimum annual payment that you would accept?
49.
How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of
10% and cash flows at the end of each period.
50.
A stream of equal cash payments lasting forever is termed:
51.
If the interest rate is 6%, which of these investments would you prefer?
52.
The present value of a perpetuity can be determined by:
53.
A perpetuity of $5,000 per year beginning today offers a 15% return. What is its present value?
54.
A bond promises to pay $1,000 20 years from today. No interest will be paid on the bonds during the 20 years If the interest
rate is 7%, what is the bond’s present value?
55.
Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second
year. The APR is 12% and payments begin in one month. What is the present value of this 2-year loan?
56.
Which one of the following will increase the present value of an annuity, other things equal?
57.
What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is
made today?
58.
The sum of $3,000 is deposited into an account paying 10% annually. If $1,206 is withdrawn at the end of years 1 and 2,
how much then remains in the account?”
59.
Suppose you take out a 30-year mortgage for $100,000 with annual payments. The interest rate on the mortgage is 8%. When
you have paid off half the mortgage, so that the value of the remaining payments is reduced to $50,000, how many more
payments need to be made?
60.
What is the present value of a four-year annuity of $100 per year that makes its first payment 2 years from today if the
discount rate is 9%?