1. To borrowers (student loans, car purchases, home mortgages), the most desirable compounding period is:
a. Annually
b. semi-annually
c. monthly
d. daily
2. A home mortgage loan and the related financial calculations are an example of _____.
a. a present value of a dollar problem
b. a future value of a dollar problem
c. a present value of an annuity problem
d. a future value of an annuity problem
3. Payments if it is made at end of each period such as an end of year is classified as
a. ordinary annuity
b. deferred annuity
c. annuity due
d. Both A and B
4. Which of the following statements is false?
a. An annuity is a stream of equal payments.
b. An annuity due has the payments made at the beginning of each period.
c. An ordinary annuity has the payments made at the end of each period.
d. Annuity tables provide annuity interest rate factors for ordinary annuity streams.
5. The present value of an annuity increases as:
a. the number of discount periods decreases
b. the discount rate decreases
c. the payment amount per period decreases
d. the annual interest rate decreases
6. If the interest rate is zero:
a. PV = FVn
b. PV = FVn
c. FV = PV
d. FV = PV/en
7. You are considering two investments: A & B. Both provide a cash flow of $100 per year for n years. However, cash flows in A come at the beginning of each year, while in B at the end of each year. If the present value of cash flows from A is P, and discount rate is r, what is present value of cash flows from B?
a. P/(1+r)
b. P(1+r)
c. P/(1+r)n
d. P(1+r)n
8. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would
a. fall.
b. rise.
c. remain unchanged.
d. cannot be determined without more information.
9. In a typical loan amortization schedule, the total dollar amount of money paid each period .
a. increases with each payment
b. decreases with each payment
c. remains constant with each payment
d. can’t be determined
10. In a typical loan amortization schedule, the dollar amount of interest paid each period .
a. increases with each payment
b. decreases with each payment
c. remains constant with each payment
d. can’t be determined
11. The Richards Company purchased a machine for $5,000 down and $300 a month payable at the end of each of the next 36 months. How would the cash price of the machine be calculated, assuming the annual interest rate is given?
a. $5,000 plus the present value of $10,800 ($300 x 36).
b. $5,000 plus the present value of an annuity due of $300 for 36 periods.
c. $15,800.
d. $5,000 plus the present value of an ordinary annuity of $300 for 36 periods.
12. Given a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information is necessary to calculate the present value of the series of payments?
a. The future value of the annuity.
b. The timing of the payments (whether they are at the beginning or end of the period).
c. The rate of inflation.
d. No other information is required.