Finance Questions

The present value of an ordinary annuity formula isA) (C/ r)(1 / (1 + r)T(1 + r)B) C({1 - [1 / (1 + r)T]}/ r)C) [C(1 + r)T/ r] / (1 + r)D) (C/ r)(1 / (1 + r)TE) C(1 + r)T/ r(1 + r)

Annuities with payments occurring at the end of each time period are called ________, whereas annuities with payments occurring at the beginning of each time period are called ________.A) ordinary annuities; early annuitiesB) ordinary annuities; annuities dueC) annuities due; ordinary annuitiesD) straight annuities; deferred annuitiesE) deferred annuities; straight annuities

Which type(s) of loan repays the interest as an annuity and the principal as a lump sum?A) Pure discount loansB) Both amortized and interest-only loansC) Amortized loansD) Both interest-only and amortized loansE) Interest-only loans

A 10-year, $600 annuity pays its first payment at Date 3. If you compute the present value of this annuity, the computed value will be as of DateA) 0B) 1C) 2D) 3E) 4

The future value of an annuity due is computed asA) C(1 + r)TB) C{[(1 + r)T - 1] / r}C) C{[(1 + r)T - 1] / (1 + r)}D) C(1 + r)T - 1 / (1 + r)E) C{[(1 + r)T - 1] / r}(1 + r)

Assume two annuities will each provide $500 annual cash flows for 5 years. One is an ordinary annuity and the other is an annuity due. Which statement concerning these annuities is correct?A) The ordinary annuity will pay on the first day of each time period.B) The annuity due is more valuable than the ordinary annuity.C) The annuity due will pay one more payment than the ordinary annuity.D) The ordinary annuity will have the highest value at the end of Year 4.E) Both annuities are of equal value given any positive discount rate.

An investment will pay $3,000 every 3 years with the first payment occurring 3 years from today. The investment has a 12-year life. To compute the present value of this investment you need to calculate theA) present value of a $3,000, 12-year annuity, and divide the result by 4.B) present value of a $1,000 annuity with 12 time periods.C) rate of growth for each 3-year period.D) present value of a $3,000 annual annuity with four payments and discount that value for 3 years.E) interest rate for the 3-year period.

Given a positive rate of return and multiple time periods, compound interestA) increases in an exponential manner.B) increases in a linear manner.C) produces the same future values as simple interest.D) provides future values that are less than those provided by simple interest.E) increases at a decreasing rate.

The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed asA) 0.09e - 1B) e0.09 × (1 / 0.09)C) e0.09 - 1D) e × (1 + 0.09)E) (1 + 0.09)e

The growing perpetuity present value formula assumes thatA) g= rand the time periods are limited in number.B) g< rand the time periods are regular and discrete.C) the growth rate increases as time progresses.D) the first cash flow occurs at Time 0.E) g< rand the time periods are finite.

Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?A) PerpetuityB) Growing annuityC) Growing perpetuityD) AnnuityE) Lump sum payment

Which one of the following statements concerning interest rates is correct?A) The stated rate is the same as the effective annual rate.B) Banks are most apt to prefer more frequent compounding on their savings accounts.C) The annual percentage rate increases as the number of compounding periods per year increases.D) An effective annual rate is the rate that applies if interest were charged annually.E) For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?A) Pure discount loanB) Both pure discount and interest-only loansC) Amortized loanD) Both interest-only and amortized loansE) Interest-only loan

Which statement applies to an amortized loan that requires fixed principal payments?A) The loan payments will be either an ordinary annuity or an annuity due.B) The final loan payment will equal the required principal payment amount.C) The interest is paid only at loan maturity.D) The loan payments are an annuity due.E) The loan payments will decrease over time.

Which one of the following statements concerning the annual percentage rate (APR) is correct?A) The APR considers interest on interest.B) The rate of interest you actually pay on a loan is called the APR.C) The effective annual rate is lower than the APR when an interest rate is compounded quarterly.D) Lenders are not permitted to disclose or advertise the APR of a loan.E) The APR equals the effective annual rate when simple interest is applied to a loan.

3) The net present value of an investment is best defined as theA) current cost if the investment is made today.B) net value received at the end of the investment period.C) present value of the investment's future cash flows minus the investment's cost.D) net decrease in value caused by waiting to receive the cash benefit from the investment.E) value received at the end of the investment period minus the investment's cost.

Later on today, you will receive an annual dividend of $2.50 a share on ABC stock. The dividend is expected to increase by 2 percent annually thereafter. Which formula should be used to compute the value of the stock today if the discount rate is 14 percent?A) $2.50 + $2.50 / 0.14B) ($2.50 × 1.02) / (0.14 - 0.02)C) ($2.50 × 1.02) / 0.14D) $2.50 + ($2.50 × 1.02) / (0.14 - 0.02)E) $2.50 + ($2.50 × 1.02) / 0.14

An interest rate expressed as if it were compounded once per year is called theA) periodic interest rate.B) compound interest rate.C) stated annual rate.D) daily interest rate.E) effective annual rate.

Wise University expects to receive $100 next year from a new donor. They also expect this amount to increase by 3 percent annually and to continue forever. Which formula will correctly compute the current value of this donation at a discount rate of 13 percent?A) $100 / 0.13 + 0.03B) $100 / (0.13 - 0.03)C) ($100 × 1.03) / 0.13D) ($100 × 1.03) / (0.13 - 0.03)E) $100 + ($100 × 1.03) / (0.13 - 0.03)

Assume a stated rate of interest of 8 percent. Which form of compounding will produce the highest effective rate of interest?A) DailyB) AnnualC) ContinuousD) MonthlyE) Semiannual