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Chapter 06
Discounted Cash Flow Valuation
Multiple Choice Questions
1.
An ordinary annuity is best defined by which one of the following?
2.
Which one of the following accurately defines a perpetuity?
3.
Which one of the following terms is used to identify a British perpetuity?
4.
The interest rate that is quoted by a lender is referred to as which one of
the following?
5.
A monthly interest rate expressed as an annual rate would be an example of
which one of the following rates?
6.
What is the interest rate charged per period multiplied by the number of
periods per year called?
7.
A loan where the borrower receives money today and repays a single lump
sum on a future date is called a(n) _____ loan.
8.
Which one of the following terms is used to describe a loan that calls for
periodic interest payments and a lump sum principal payment?
9.
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?
10.
Which one of the following terms is defined as a loan wherein the regular
payments, including both interest and principal amounts, are insufficient to
retire the entire loan amount, which then must be repaid in one lump sum?
11.
You are comparing two annuities which offer quarterly payments of $2,500
for five years and pay 0.75 percent interest per month. Annuity A will pay
you on the first of each month while annuity B will pay you on the last day
of each month. Which one of the following statements is correct concerning
these two annuities?
12.
You are comparing two investment options that each pay 5 percent interest,
compounded annually. 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?
13.
You are considering two projects with the following cash flows:
Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a
positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Project X has a higher present value than Project Y, given a positive
discount rate.
IV. Project Y has a higher present value than Project X, given a positive
discount rate.
14.
Which one of the following statements is correct given the following two
sets of project cash flows?
15.
Which one of the following statements related to annuities and perpetuities
is correct?
16.
Which of the following statements related to interest rates are correct?
I. Annual interest rates consider the effect of interest earned on reinvested
interest payments.
II. When comparing loans, you should compare the effective annual rates.
III. Lenders are required by law to disclose the effective annual rate of a
loan to prospective borrowers.
IV. Annual and effective interest rates are equal when interest is
compounded annually.
17.
Which one of the following statements concerning interest rates is correct?
18.
Which one of these statements related to growing annuities and
perpetuities is correct?
19.
Which one of the following statements correctly states a relationship?
20.
Which one of the following compounding periods will yield the smallest
present value given a stated future value and annual percentage rate?
21.
The entire repayment of which one of the following loans is computed
simply by computing a single future value?
