ACC 3008

Finance 1

Quiz 3

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Multiple Choice Questions – Chapter 6
 

1. A loan where the borrower receives money today and repays a single lump sum at some time
in the future is called a(n) ___________ loan. 
A. Amortized.
B. Continuous.
C. Pure discount.
D. interest-only

 2. Aloan where the borrower pays interest each period and repays the entire principal of the
loan at some point in the future is called a(n) ___________ loan. 
A. Amortized.
B. Continuous.
C. Balloon.
D. Interest-only. 

3. The present value factor for annuities is calculated as: 

A. (1 - present value factor)/r
B. Present value factor + (1/r)
C. (Present value factor/r) + (1/r)

4. A loan where the borrower pays interest each period, repays part of the principal of the loan
over time, and repays the remainder of the principal at the end of the loan, is called a(n)
_____________ loan. 
A. Amortized.
B. Balloon.
C. Pure discount.
D. Interest-only.

5. Which of the following fit the definition of an annuity?

I. $100 a quarter for 10 years

II. $200 a year forever
III. $10 a week for 1,000 weeks
IV $150 a month for 72 months 
A. I and IV only
B. II only
C. I, III, and IV only
D. I, II, III, and IV

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6. The formula {C}{[1 - (1/(1 + r)t )]/r} is the _______ formula. 

A. Future value.
B. Future value of an annuity.
C. Present value of an annuity.
D. Perpetuity.

7. An annuity due is a series of: 

A. Equal payments that occur at the beginning of each time period and continue forever.
B. Equal payments that occur at the beginning of each time period for a set period of time.
C. Unequal payments that occur at the end of each time period for a set period of time.
D. Equal payments that occur at the end of each time period and continue forever.

8. A perpetuity is a series of payments that: 

A. Are equal in amount and occur over a set period of time.
B. Vary in amount but occur forever.
C. Vary in amount and occur over a set period of time.
D. Are equal in amount and continue forever.
 

9. The effective annual rate is equal to: 

A. [1 - Quoted rate/m]t/r.
B. [1 - Quoted rate/m]m-1.
C. [1 + Quoted rate/m]m-1.
D. [1 - Quoted rate/m]m [r].

10. When interest is credited the instant it is earned it is referred to as: 

A. Simple interest.
B. Continuously compounded interest.
C. Amortized daily interest.
D. Annuitized interest.

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11. An annuity stream where the payments occur forever is called a(n): 
A. Annuity due.
B. Perpetuity.
C. Amortized cash flow stream.
D. Amortization table.

  

12. The interest rate expressed in terms of the interest payment made each period is called the
_____ rate. 
A. Compound interest.
B. Effective annual.
C. Periodic interest.
D. Stated interest.
 

13. The interest rate expressed as if it were compounded once per year is called the _____ rate. 
A. Stated interest.
B. Effective annual.
C. Periodic interest.
D. Daily interest.

14. Beatrice has a credit card that applies interest every month to her account balance. In this
case, Beatrice is paying an interest rate that: 
A. Equals the rate stated on her billing statement as the APR.
B. Is greater than the APR shown on her billing statement.
C. Is equal to the annual percentage rate as required by the government.
D. Will decline automatically as her account balance declines.
 

15. If you are borrowing money, which one of the following rates would you prefer? 

A. 9% compounded semi-annually

B. 9% compounded quarterly
C. 9% compounded monthly
D. 9% paid annually

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16. The effective annual rate on your savings account assumes that: 
A. You withdraw the interest as soon as it is earned.
B. All interest is withdrawn from the account at the end of each year.
C. The annual percentage rate varies as the prime rate varies.
D. All interest payments are reinvested at the same rate as the original deposit into the account.

17. Which one of the following statements concerning an ordinary annuity is true? 

A. An ordinary annuity consists of equal payments that occur at the beginning of each period
over a set period of time.
B. The future value of an ordinary annuity can be computed by dividing the future value of an
annuity due by (1 + r).
C. If two annuities are equal in every way except that one is an ordinary annuity and one is an
annuity due, then the ordinary annuity will have a larger present value than the annuity due.
D. Most financial calculators can compute ordinary annuity problems but not annuity due
problems.

18. Which of the following statements is (are) true concerning a timeline?

I. A timeline is a visual drawing depicting cash flows.

II. As you move leftward on a timeline, you move further into the future.
III. Time 0 generally represents today.
IV. A timeline with no future ending point is a perpetuity. 
A. I and II only
B. I and III only
C. II and IV only
D. I, III, and IV only
 

19. In the annuity present value formula, the variable "r" must be expressed as a(n): 
A. Annual percentage rate.
B. Effective annual rate.
C. Stated rate per period of time t.
D. Continuously compounded rate.

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20. You are trying to use your financial calculator to solve a present value problem that has
unequal cash flows. You input monies you receive as positive values. Which one of the
following statements is true? 
A. Cash outflows should be input as positive values for each year in which they occur.
B. Any cash flow occurring today should be input as a Year 1 cash flow.
C. You have annual cash flows starting with Year 1 of $100, $0, $200, and $300. The $300 cash
flow should be input as occurring in year 3.
D. A negative present value indicates that this series of cash flows causes you to lose money
today given a certain discount rate.

21. Which one of the following is correct concerning ordinary annuities and annuities due? 
A. An annuity due will have a larger future value than an ordinary annuity given that the
annuities are otherwise identical.
B. An annuity due applies only to equal payments made in annual increments.
C. The majority of annuities are annuities due.
D. An ordinary annuity is one where the payment occurs at the beginning of the period.

22. 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? 
A. Both annuities are of equal value today.
B. Annuity A has a higher future value than annuity B.
C. Annuity B has a higher present value than annuity A.
D. Both annuities have the same future value as of ten years from today.

23. 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? 
A. Option A is the better choice of the two given any positive rate of return.
B. Option B has a higher present value than option A given a positive rate of return.
C. Option B has a lower future value at year 5 than option A given a zero rate of return.
D. Option A is preferable because it is an annuity due.

 
 

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24. You are considering two projects with the following cash flows:

   

Which of the following statements are true concerning these two projects?

I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Both projects have the same future value at any point in time, given a positive rate of return.
IV. Project A has a higher future value than project B, given a positive rate of return. 

A. IV only
B. I and III only
C. II and IV only
D.  II only

25. A perpetuity differs from an annuity because: 

A. Perpetuity payments vary with the rate of inflation.
B. Perpetuity payments vary with the market rate of interest.
C. Perpetuity payments never cease.
D. Annuity payments never cease.

26. Which one of the following statements concerning the annual percentage rate is correct? 
A. The annual percentage rate considers interest on interest.
B. The rate of interest you actually pay on a loan is called the annual percentage rate.
C. The effective annual rate is lower than the annual percentage rate when an interest rate is
compounded quarterly.
D. The annual percentage rate equals the effective annual rate when the rate on an account is
designated as simple interest.

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27. A pure discount loan is a(n): 
A. Loan that is interest-free.
B. Loan that gives you a discount if you pay your payments on time.
C. Loan that requires all principle to be paid at the time the loan is made.
D. Example of a present value problem.

 28. The
principle amount of an interest-only loan is: 
A. Never repaid.
B. Repaid in full at the end of the loan period.
C. Repaid in equal annual payments even when the loan interest is repaid monthly.
D. Repaid in increasing increments and included in each loan payment.
 
 

29. An amortized loan: 

A. May have equal or increasing amounts applied to the principle from each loan
 payment.
B. Requires that all interest be repaid on a monthly basis while the principle is repaid at the end
of the loan term.
C. Requires that all payments be equal in amount and include both principle and interest.
D. Is the type of loan that describes most corporate bonds.

30. If you are investing money, you should prefer an ______ and if you are borrowing money
you should prefer an _____. 
A. Annuity due; ordinary annuity
B. Ordinary annuity; annuity due
C. Ordinary annuity; ordinary due
D. You should have no preference as it makes no difference.

31. You are comparing two annuities. Both annuities pay the same amount for the same number
of months. The discount rate is also identical. If the ordinary annuity is worth $26,500, the
annuity due is worth: 
A. $26,500  (1 + r).
B. $26,500  (1 + r)t.
C.  $26,500  [1 + (r/12)].
D. $26,500/[1 + (r/12)]t.

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32. The difference between an annuity and a perpetuity is the: 
A. Range of applicable discount rates.
B. Number of time periods.
C. Fluctuating value of the cash flows.
D. Infrequency of the cash flows.

33. You are considering two loan offers. All else equal, you should accept the loan: 
A. With the least frequent compounding period.
B. With the most frequent compounding period.
C.  With the lowest effective annual rate.
D. With the lowest stated interest rate.

 
  34. The
maximum rate which a bank can earn given a stated annual percentage rate is the rate
which is computed using: 

A. Daily compounding.
B. Simple interest.
C. Annual compounding.
D. Continuous compounding.
 

35. Which one of the following terms would best describe the type of compounding that occurs
when interest is compounded continuously? 
A. Irregular.
B. Daily.
C. Minute by minute.
D. Instantaneous.
 

  36. Donavan borrowed $10,000 for three years at 10 percent annual interest. The payment he
owes for the second year of the loan is $1,000. Donavan has a(n) _____ loan. 
A. Balloon.
B. Amortized.
C. Interest-only.
D. Discount.
 

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37. Each month that Jennifer pays a payment on her personal loan, the amount that is applied to
the principal balance increases. Jennifer has a(n)_____ loan. 

A. Balloon.
B. Variable.
C. Discount.
D. Amortized.

38. Which of the following will increase the effective annual rate?

I. Increasing the frequency of the compounding.

II. Decreasing the frequency of the compounding.
III. Increasing the stated rate.
IV. Decreasing the annual percentage rate. 
A. I only
B. I and III only
C. I and IV only
D. II and IV only

  

39. Which one of the following is correct concerning the annual percentage rate (APR)? 
A. The APR is greater than the effective annual rate.
B. The APR is the rate which lenders are required to disclose.
C. The APR is best used to compare offers from various lenders.
D. The APR considers all the effects of compounding.

40. Which one of the following is true concerning amortized loans? 

A. Amortized loans all have a balloon payment at the end of the loan term.
B. Amortized loan payments consist of interest only.
C. An amortized loan requires only one lump sum payment at the end of the loan term.
D. A loan where annual payments include the interest due plus some set amount of principal is
an amortized loan.

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