Q&A Hero

Q: Which of the following statements is true of amortization? A) With an amortized loan, a bigger proportion of each month's payment goes toward interest in the early periods. B) With an amortized loan, a bigger proportion of each month's payment goes toward interest in the later periods. C) With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods. D) With an amortized loan, the interest portion of each month's payment remains unchanged.

Q: Which of the following statements is true of amortization? A) With an amortized loan, a periodical payment of principal portion gradually decreases over a period. B) Amortization schedule represents only the interest portion of the loan. C) With an amortized loan, a bigger proportion of each month's payment goes toward interest in the early periods. D) The computation of loan amortization is wholly based on the computation of simple interest.

Q: Which of the following statements is true of amortization? A) Amortization solely refers to the total value to be paid by the borrower at the end of maturity. B) The amortization schedule represents only the interest portion of the loan. C) The computation of loan amortization is wholly based on the computation of simple interest. D) The amortization schedule provides the data of equated monthly payments for which the classification of principal and interest along with unpaid principal balance is provided.

Q: Cash flows associated with annuities are considered to be: A) an uneven cash flow stream. B) a constant cash flow stream. C) a mix of constant and uneven cash flow streams. D) a cash flow stream with decreasing trend.

Q: A preferred stock would be an ideal example of: A) a perpetuity. B) an ordinary annuity. C) an annuity due. D) a growing annuity.

Q: If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called: A) a perpetuity. B) an ordinary annuity. C) an annuity due. D) a growing perpetuity.

Q: If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called: A) a perpetuity. B) an ordinary annuity. C) an annuity due. D) a growing perpetuity.

Q: The future value of multiple cash flows is: A) greater than the sum of the cash flows. B) equal to the sum of all the cash flows. C) less than the sum of the cash flows. D) higher or lower than the cash flows depending on the interest rate.

Q: The present value of multiple cash flows is: A) greater than the sum of the cash flows. B) equal to the sum of all the cash flows. C) less than the sum of the cash flows. D) higher or lower than the cash flows depending on the interest rate.

Q: Anna would receive $15,000 from a bank deposit after 2 years which had an interest of 3.5%. The amount of $15,000 represents the: A) present value of an annuity B) future value of an annuity C) present value D) future value

Q: In computing the present and future value of multiple cash flows: A) each cash flow is discounted or compounded at the same rate. B) each cash flow is discounted or compounded at a different rate. C) earlier cash flows are discounted at a higher rate. D) later cash flows are discounted at a higher rate.

Q: William deposited $25,000 today that would earn an interest at the rate of 3% for a period of 2 years. The amount of $25,000 represents the: A) present value of an annuity B) future value of an annuity C) present value D) future value

Q: Which of the following is true of discounting factor? A) Discounting factor is the reciprocal of compounding factor. B) Discounting factor is the sum of 1 and the rate of interest. C) Discounting factor is period n times the rate of interest. D) Discounting factor is computed by dividing period n by the sum of 1 and the rate of interest.

Q: Nick invested $2,000 in a bank savings account today and another $2000 a year from now. If the bank pays interest of 10 percent per year, how much money will Nick have at the end of two years? A) $4,210 B) $4,200 C) $4,000 D) $4,620

Q: The present value of future cash flows are computed by multiplying future value with the: A) discounting factor. B) compound factor. C) interest rate. D) number of periods.

Q: Which of the following is used as the denominator while calculating the present value for a growing perpetuity that begins next period (PVP)? A) The difference between i (the discount or interest rate) and g (the constant rate of growth of the cash flow) B) i (the discount or interest rate) C) g (the constant rate of growth of the cash flow) D) The addition of i (the discount or interest rate) and g (the constant rate of growth of the cash flow)

Q: The present value of growing perpetuity is computed as the cash flow occurring at the end of the first period divided by the difference between interest or discount rate and growth rate. A) True B) False

Q: Growing perpetuity is widely used in the valuation of common stock of firms that have a policy and history of paying dividends that grow at a constant rate. A) True B) False

Q: For computation of the present value of growing annuity with n periods, the cash flow for the current period is used and not the cash flow to be received in the next period. A) True B) False

Q: A growing annuity for an infinite period is called a growing perpetuity. A) True B) False

Q: A car manufacturer enters into a contract for 25-years lease of warehouse rental that adjusts annually for the expected rate of inflation over the life of the contract. This is an example of growing perpetuity. A) True B) False

Q: Only the annual percentage rate (APR) or some other quoted rate should be used as the interest rate factor for present or future value calculations. A) True B) False

Q: The Truth-in-Lending Act and the Truth-in-Savings Act require by law that the annual percentage rate (APR) be disclosed on all consumer loans and savings plans and that it be prominently displayed on advertising and contractual documents. A) True B) False

Q: The quoted interest rate is by definition a simple annual interest rate,such as the effective annual interest rate (EAR). A) True B) False

Q: The quoted interest rate is by convention a simple annual interest rate,such as the annual percentage rate (APR). A) True B) False

Q: The effective annual interest rate (EAR) is the true cost of borrowing and lending. A) True B) False

Q: The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account. A) True B) False

Q: The correct way to annualize an interest rate is to compute the annual percentage rate (APR). A) True B) False

Q: The correct way to annualize an interest rate is to compute the effective annual interest rate. A) True B) False

Q: The annual percentage rate (APR) is defined as the simple interest charged per period multiplied by the number of periods per year. A) True B) False

Q: The annual percentage rate (APR) is the annualized interest rate using compound interest. A) True B) False

Q: Natalia Greenberg opened a pizza place last year. She expects to increase her revenue from last year by 7 percent every year for the next 10 years. This is an example of a growing annuity. A) True B) False

Q: You have received news about an inheritance that will pay you $5,000 next year. Beginning the following year, your inheritance will increase by 5 percent every year forever. This is a growing perpetuity. A) True B) False

Q: A fertilizer manufacturing company enters into a contract with a county parks and recreation department that calls for the company to sell 10 percent more of its best lawn feed every year for the next five years. If they also agree to maintain the total price as constant over the contract period, this growth in revenue is an example of a growing perpetuity. A) True B) False

Q: Cash flow streams that increase at a constant rate over time are called growing annuities or growing perpetuities. A) True B) False

Q: The future value of an annuity due is equal to the future value of an ordinary annuity. A) True B) False

Q: The future value of an annuity due is greater than the future value of an ordinary annuity. A) True B) False

Q: The present value of an annuity due is equal to the present value of an ordinary annuity. A) True B) False

Q: The present value of an annuity due is less than the present value of an ordinary annuity. A) True B) False

Q: The lease payments by a business of a warehouse rental are an example of an annuity due. A) True B) False

Q: In an annuity due, cash flows occur at the beginning of each period. A) True B) False

Q: In ordinary annuities, cash flows occur at the beginning of each period. A) True B) False

Q: The present value of a perpetuity is the promised constant cash payment divided by the interest rate (i). A) True B) False

Q: Since the issuers of preferred stock promise to pay investors a fixed dividend, usually quarterly, forever, these are the most important perpetuities in the financial markets. A) True B) False

Q: In today's financial markets, the best example of a perpetuity is the common stock issued by firms. A) True B) False

Q: Allen Bell pay the same amount every month on a car loan for a period of three years, the stream of cash flows is called an annuity. A) True B) False

Q: Jacob Oram pay the same amount every month as insurance premium for a term life policy for a period of five years, the stream of cash flows is called a perpetuity. A) True B) False

Q: The present value of multiple cash flows is greater than the sum of those cash flows. A) True B) False

Q: In computing the present and future value of multiple cash flows, each cash flow is discounted or compounded at a same rate. A) True B) False

Q: Calculating the present and future values of multiple cash flows is relevant for businesses only. A) True B) False

Q: Calculating the present and future values of multiple cash flows is relevant only for individual investors. A) True B) False

Q: What are the three ways of interest rate quoted in the market place?

Q: What was the purpose behind the passage of the two consumer protection acts discussed in this chapter?

Q: The annual percentage rate (APR) is not the appropriate rate to perform present or future value calculations. Explain this statement.

Q: How is an annuity due different from the ordinary annuity?

Q: Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal a rate of 8.40 percent with monthly compounding. At what rate would you discount the payments to find amount borrowed by Surreal Corp.? (Round to two decimal places.)A) 8.40%B) 8.73%C) 8.95%D) 8.44%

Q: Beautinator Cosmetics borrowed $152,300 from a bank for three years. If the quoted rate (APR) is 11.75 percent, and the compounding is daily, what is the effective annual rate (EAR)? (Round to one decimal place.)A) 11.7%B) 14.3%C) 12.5%D) 11.6%

Q: Foodelicious Corp. is evaluating whether it should take over the lease of an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. The restaurant has been growing steadily at a 7 percent growth for the last several years. Foodelicious Corp. expects the restaurant to continue to grow at the same rate for the remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the firm evaluates similar investments at 15 percent, what is the present value of this investment? (Round to the nearest dollar.)A) $2,966,350B) $2,838,182C) $3,109,460D) $2,709,124

Q: Shelton Enterprises is expecting tremendous growth from its newest boutique store. Next year the store is expected to bring in net cash flows of $675,000. The company expects its earnings to grow annually at a rate of 13 percent for the next 15 years. What is the present value of this growing annuity if the firm uses a discount rate of 18 percent on its investments? (Round to the nearest dollar.)A) $6,448,519B) $6,750,000C) $7,115,449D) $5,478,320

Q: Bryant Investments is putting out a new product. The product will pay out $32,000 in the first year, and after that the payouts will grow by an annual rate of 2.75 percent forever. If you can invest the cash flows at 7.25 percent, how much will you be willing to pay for this perpetuity? (Round to the nearest dollar.)A) $721,111B) $633,111C) $531,111D) $711,111

Q: Noel Klinger is planning to invest in an insurance company product. The product will pay $12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5 percent rate forever. Jack will be able to invest his cash flows at a rate of 5.5 percent. What is the present value of this investment cash flow stream? (Round to the nearest dollar.)A) $326,908B) $312,766C) $416,667D) $446,667

Q: Your inheritance will pay you $100,000 a year for five years beginning now. You can invest it in a CD that will pay 7.75 percent annually. What is the present value of your inheritance? (Round to the nearest dollar.)A) $399,356B) $401,916C) $433,064D) $467,812

Q: : Ann Chang is investing $2,500 today and will do so at the beginning of each of the next six years for a total of seven payments. If her investment can earn 12 percent, how much will she have at the end of seven years? (Round to the nearest dollar.)A) $25,223B) $28,249C) $31,127D) $29,460

Q: Jeff Lovett has a five-year loan on which he will make annual payments of $2,235, beginning now. If the interest rate on the loan is 8.3 percent, what is the present value of this annuity? (Round to the nearest dollar.)A) $9,588B) $8,854C) $8,612D) $9,122

Q: You plan to save $1,400 for the next four years, beginning now, to pay for a vacation. If you can invest it at 6 percent, how much will you have at the end of four years? Round to the nearest dollar.A) $6,124B) $5,618C) $4,019D) $6,492

Q: Ralf Wilson wants to receive $25,000 in perpetuity and will invest his money in an investment that will earn a return of 14 percent annually. What is the value of the investment that he needs to make today to receive his perpetual cash flow stream? (Round to the nearest dollar.)A) $640,225B) $252,325C) $144,350D) $178,571

Q: Sid Phillips has funded a retirement investment with $250,000 earning a return of 6.75 percent. What is the value of the payment that he can receive in perpetuity? (Round to the nearest dollar.) A) $12,150 B) $15,250 C) $16,875 D) $14,900

Q: Brandon Ramirez wants to set up a scholarship at his alma mater. He is willing to invest $320,000 in an account earning 11 percent. What will be the annual scholarship that can be given from this investment? (Round to the nearest dollar.) A) $50,000 B) $32,600 C) $35,200 D) $40,300

Q: A lottery winner was given a perpetual payment of $25,362. She could invest the cash flows at 7.5 percent. What is the present value of this perpetuity? (Round to the nearest dollar.) A) $338,160 B) $390,215 C) $238,160 D) $201,356

Q: Stuart Weddle's father is 55 years old and wants to set up a cash flow stream that would be forever. He would like to receive $15,000 every year, beginning at the end of this year. If he could invest in account earning 9 percent, how much would he have to invest today to receive his perpetual cash flow? (Round to the nearest dollar.)A) $166,667B) $200,000C) $222,222D) $135,200

Q: James Perkins wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8 percent annually. How much does he need to save each year, beginning at the end of this year to reach his target? Assume he could earn 8 percent on any investment he makes. (Round to the nearest dollar.)A) $13,464B) $14,273C) $10,900D) $16,110

Q: Tim Dodson has borrowed $8,600 to pay for his new car. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment beginning now? (Round to the nearest dollar.)A) $2,229B) $2,304C) $2,850D) $2,448

Q: Dawson Electricals has borrowed $27,850 from its bank at an annual rate of 8.5 percent. It plans to repay the loan in eight equal installments, beginning at the end of next in a year. What is its annual loan payment? (Round to the nearest dollar.) A) $4,708 B) $5,134 C) $4,939 D) $4,748

Q: Cassandra Dawson wants to save for a trip to Australia. She will need $12,000 at the end of four years. She can invest a certain amount at the beginning of each of the next four years in a bank account that will pay her 6.8 percent annually. How much will she have to invest annually to reach her target? (Round to the nearest dollar.) A) $3,000 B) $2,980 C) $2,538 D) $2,711

Q: Viviana Carroll needs to have $25,000 in five years. If she can earn 8 percent on any investment, what is the amount that she will have to invest every year at the end of each year for the next five years? (Round to the nearest dollar.) A) $5,000 B) $4,261 C) $4,640 D) $4,445

Q: Rosalia White will invest $3,000 in an IRA for the next 30 years starting at the end of this year. The investment will earn 13 percent annually. How much will she have at the end of 30 years? (Round to the nearest dollar.) A) $879,598 B) $912,334 C) $748,212 D) $1,233,450

Q: Barbara Lakey is saving to buy a new car in four years. She will save $5,500 at the end of each of the next four years. If she invests her savings at 7.75 percent, how much will she have after four years? (Round to the nearest dollar.)A) $22,000B) $23,345C) $27,556D) $28,692

Q: John Mason decided to save $2,250 at the end of each of the next three years to pay for a vacation. If he invests it at 8 percent, how much will he have at the end of three years? (Round to the nearest dollar.)A) $7,304B) $7,403C) $6,297D) $7,010

Q: Shaun Barringer has started on his first job. He plans to start saving for retirement. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Shaun have at the end of 45 years? (Round to the nearest dollar.) A) $2,667,904 B) $3,594,524 C) $1,745,600 D) $5,233,442

Q: Lloyd Harris is planning to invest $3,500 every year for the next six years in an investment paying 13 percent annually. What will be the amount he will have at the end of the six years? (Round to the nearest dollar.) A) $21,000 B) $29,129 C) $24,670 D) $26,124