FIN Ch. 5

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?

annuity

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?

annuity due

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?

perpetuity

A perpetuity in Canada is frequently referred to as which one of the following?

consul

The stated interest rate is the interest rate expressed:

in terms of the interest payment made each period

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:

effective annual rate

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:

annual percentage rate

Which one of the following will decrease the present value of an annuity?

decrease in the annuity payment

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?

to compute the initial loan amount, you must use a monthly interest rate

Which one of the following statements is true concerning annuities?

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Which one of the following is the annuity present value formula?

C × {{1 – [1/(1 + r)t]}/r}

Which one of the following is an example of a perpetuity?

Trust income of $1,200 a year forever

Which one of the following can be classified as an annuity but not as a perpetuity?

Equal annual payments for life

Which one of the following statements concerning annuities is correct?

An annuity due has payments that occur at the beginning of each time period.

Which one of the following qualifies as an annuity?

auto loan payment

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

I and IV only

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

I and III only

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?

Annuity B has both a higher present value and a higher future value than Annuity A.

Which one of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments

Which one of the following is an ordinary annuity, but not a perpetuity?

$25 paid weekly for 1 year, starting one week from today

Which one of the following cannot be computed?

Future value of a perpetuity

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?

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due

Which one of the following has the highest effective annual rate?

6 percent compounded monthly

When comparing savings accounts, you should select the account that has the:

higher effective annual rate

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

will be greater than 12.9 percent

Which one of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options.

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

charge interest annually.

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):

pure discount loan.

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?

pure discount

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?

interest-only

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?

amortized

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?

amortized

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?

interest-only