FIN Ch. 5

25 July 2022
4.7 (114 reviews)
33 test answers

Unlock all answers in this set

Unlock answers (29)
question
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?
answer
annuity
question
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?
answer
annuity due
question
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?
answer
perpetuity
question
A perpetuity in Canada is frequently referred to as which one of the following?
answer
consul
question
The stated interest rate is the interest rate expressed:
answer
in terms of the interest payment made each period
question
Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:
answer
effective annual rate
question
Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
answer
annual percentage rate
question
Which one of the following will decrease the present value of an annuity?
answer
decrease in the annuity payment
question
Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?
answer
to compute the initial loan amount, you must use a monthly interest rate
question
Which one of the following statements is true concerning annuities?
answer
All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
question
Which one of the following is the annuity present value formula?
answer
C × {{1 - [1/(1 + r)t]}/r}
question
Which one of the following is an example of a perpetuity?
answer
Trust income of $1,200 a year forever
question
Which one of the following can be classified as an annuity but not as a perpetuity?
answer
Equal annual payments for life
question
Which one of the following statements concerning annuities is correct?
answer
An annuity due has payments that occur at the beginning of each time period.
question
Which one of the following qualifies as an annuity?
answer
auto loan payment
question
Which of the following characteristics apply to a perpetuity? I. Constant cash flow dollar amount II. Unequal cash flow dollar amount III. Limited time period IV. Infinite time period
answer
I and IV only
question
Which of the following will increase the present value of an annuity, all else held constant? I. Increase in the number of payments II. Increase in the interest rate III. Decrease in the interest rate IV. Decrease in the payment amount
answer
I and III only
question
You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?
answer
Annuity B has both a higher present value and a higher future value than Annuity A.
question
Which one of the following features distinguishes an ordinary annuity from an annuity due?
answer
Timing of the annuity payments
question
Which one of the following is an ordinary annuity, but not a perpetuity?
answer
$25 paid weekly for 1 year, starting one week from today
question
Which one of the following cannot be computed?
answer
Future value of a perpetuity
question
You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?
answer
The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due
question
Which one of the following has the highest effective annual rate?
answer
6 percent compounded monthly
question
When comparing savings accounts, you should select the account that has the:
answer
higher effective annual rate
question
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
answer
will be greater than 12.9 percent
question
Which one of the following statements is correct?
answer
The EAR, rather than the APR, should be used to compare both investment and loan options.
question
A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:
answer
charge interest annually.
question
Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n):
answer
pure discount loan.
question
Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?
answer
pure discount
question
Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?
answer
interest-only
question
Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?
answer
amortized
question
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?
answer
amortized
question
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain?
answer
interest-only