Answer Choices:
a. The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
b. If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
c. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
d. The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
e. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
Answer: b. If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
Question: A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?
Answer Choices:
a. The periodic interest rate is greater than 3%.
b. The periodic rate is less than 3%.
c. The present value would be greater if the lump sum were discounted back for more periods.
d. The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
e. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
Answer: e. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
Question: The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.
d. If you solve for I and get a negative number, then you must have made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you can still solve for I.
Answer: e. If CF0 is positive and all the other CFs are negative, then you can still solve for I.
Question: The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.
Answer Choices:
a. True
b. False
Answer: a. True
Question: When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment’s percentage increases in the loan’s later years.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A time line is not meaningful unless all cash flows occur annually.
Answer Choices:
a. True
b. False
Answer: b. False
Question: You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?
Answer Choices:
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
b. The discount rate decreases.
c. The riskiness of the investment’s cash flows increases.
Answer: b. The discount rate decreases.
Question: As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).
Answer Choices:
a. True
b. False
Answer: b. False