SU (SelviaUtama)

Corporate Finance - Quiz Assigment 2

An annuity stream where the payments occur forever is called a(n):

	annuity due.
	amortized cash flow stream.
	amortization table.
	perpetuity.
	indemnity.

The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

		effective annual
		daily interest
		annual percentage
		periodic interest
		compound interest
	You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

		Option B has a higher present value than option A given a positive rate of return.
		Option A is preferable because it is an annuity due.
		Both options are of equal value given that they both provide $20,000 of income.
		Option A is the better choice of the two given any positive rate of return.
		Option B has a lower future value at year 5 than option A given a zero rate of return.
	What is the future value of the following cash flows at the end of year 3 if the interest rate is 7.25%? The cash flows occur at the end of each year. Year 1 =$6,800 Year 2 =$2,100 Year 3 =$0

		$10,314.00
		$8,758.04
		$10,804.36
		$8,806.39
		$10,073.99
	FV = ($6,800 x (1.0725)²) + ($2,100 x (1.0725)¹) + $0; FV = $10,073.99 You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

		Annuity A has a higher future value than annuity B.
		Both annuities have the same future value as of ten years from today.
		Annuity B is an annuity due.
		Both annuities are of equal value today.
		Annuity B has a higher present value than annuity A.
	Your credit card company quotes you a rate of 14.9%. Interest is billed monthly. What is the actual rate of interest you are paying?

	15.96%
	15.48%
	13.97%
	16.10%
	14.90%

EAR = ( 1+ (0.149/12))¹² – 1 ; EAR = 15.96%

Which one of the following statements concerning the annual percentage rate is correct?

The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

The rate of interest you actually pay on a loan is called the annual percentage rate.

The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.

The annual percentage rate considers interest on interest.

When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.

An annuity stream of cash flow payments is a set of:

	increasing cash flows occurring each time period forever.
	level cash flows occurring each time period for a fixed length of time.
	increasing cash flows occurring each time period for a fixed length of time.
	level cash flows occurring each time period forever.
	arbitrary cash flows occurring each time period for no more than 10 years.

Find the present value of $5,325 to be received in one period if the rate is 6.5%.

	$5,000.00
	$5,023.58
	$5,644.50
	$5,671.13
	None of the above.

What is the effective annual rate of 14.9% compounded continuously?

	16.01%
	16.17%
	15.96%
	16.07%
	16.05%

EAR = e^0.149 – 1 = 2.71828^0.149– 1 ; EAR = 16.07%

Using e^x on a financial calculator: EAR = 16.07 % on the Texas Instruments BA II plus, the input is: 0.149

2^nd , e^x, -1, = 0.1607 = 16.07%

Bradley Snapp has deposited $7,000 in a guaranteed investment account with a promised rate of 6% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a car after graduation. How much of a down payment will he be able to make?

	$8,837.34
	$9,175.57
	$2,175.57
	$8,960.00
	$1,960.00

Rationale:

$7,000 (1.06)⁴ = $8,837.34

Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?