Question 1

When computing the future value of an annuity, the higher the compound frequency

Accepted Answer

The higher the compound frequency, the more often interest is added to the principal, which increases the future value of the annuity due to the effect of compounding.

Question 2

The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a

Accepted Answer

The Effective Annual Rate (EAR) takes into account the effects of compounding, making it a more accurate measure of the interest rate paid for loans or investments that compound more frequently than annually, such as monthly.

Question 3

When you get your credit card bill, it will offer a minimum payment, which

Accepted Answer

The minimum payment on a credit card bill typically covers the accrued interest and a small portion of the principal. This is designed to keep the account in good standing while slowly reducing the overall balance.

Question 4

An annuity due:

Accepted Answer

An annuity due is characterized by cash flows that occur at the beginning of each period, unlike ordinary annuities where cash flows occur at the end of each period.

Question 5

Which of the following statements about annual percentage rate (APR) and effective annual rate (EAR) are not true?

Accepted Answer

The APR is not necessarily a more accurate measurement of what you will actually pay, as it does not account for the effects of compounding within the year, whereas the EAR does.

Question 6

To compute the present or future value of an annuity due, one computes the value of an ordinary annuity and then

Accepted Answer

An annuity due is an annuity for which the cash flows occur at the beginning of each period. To compute its present or future value, one first computes the value as if it were an ordinary annuity (where cash flows occur at the end of each period) and then adjusts this value to account for the earlier payments by multiplying it by (1 + i), where i is the interest rate per period. This adjustment accounts for the additional period of interest accumulation or discounting.

Question 7

Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value

Accepted Answer

Compounding more frequently (such as monthly instead of annually) increases the effective interest rate because interest is being calculated and added to the principal more often, leading to a higher future value.

Question 8

Your credit rating and current economic conditions will determine

Accepted Answer

The interest rate offered by a lender is influenced by an individual's credit rating and prevailing economic conditions. A higher credit rating typically results in lower interest rates, while economic conditions can affect overall lending rates in the market.

Question 9

Level sets of frequent, consistent cash flows are called

Accepted Answer

Annuities are financial products that provide a series of payments at equal intervals, which fits the description of level sets of frequent, consistent cash flows.

Question 10

Loan amortization schedules show

Accepted Answer

Loan amortization schedules detail both the principal balance and interest paid per period, allowing borrowers to see how each payment is split between reducing the principal and covering the interest.

Question 11

When interest rates are lower, borrowers can

Accepted Answer

The answer of When interest rates are lower, borrowers can
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Question 12

In order to discount multiple cash flows to the present, one would use

Accepted Answer

The appropriate discount rate is used to discount multiple cash flows to the present value. This rate reflects the time value of money, accounting for the risk and potential return of alternative investments.

Question 13

When moving from the left to the right of a time line, we are using

Accepted Answer

When moving from the left to the right of a timeline, we are calculating future values, which typically involves using compound interest to account for the growth of money over time.

Question 14

A perpetuity, a special form of annuity, pays cash flows

Accepted Answer

A perpetuity is characterized by periodic payments that continue indefinitely, essentially forever, which is what option D states.

Question 15

The present value of annuity payments made far into the future is

Accepted Answer

The present value of annuity payments made far into the future is worth very little today because of the time value of money principle, which states that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

Question 16

When saving for future expenditures, we can add the ________ of contributions over time to see what the total will be worth at some point in time.

Accepted Answer

The future value of contributions over time is calculated to see what the total will be worth at a future point, taking into account factors like interest or returns on investment.

Question 17

Many people who want to start investing for their future want to start today, which implies an annuity stream that is paid at the beginning of the period. Beginning-of-period cash flows are referred to as

Accepted Answer

Annuities due are characterized by payments that occur at the beginning of each period, which is the scenario described for individuals wanting to start investing with immediate effect. Ordinary annuities, in contrast, have payments at the end of each period. Perpetuities are endless annuities, and present value is a financial concept used to determine the current worth of a future stream of payments.

Question 18

People refinance their home mortgages

Accepted Answer

People typically refinance their home mortgages when interest rates fall to reduce their monthly payments or to shorten the term of their loan.

Question 19

Which of the following statements about compound frequency is not true?

Accepted Answer

Compounding frequency can be more varied than just annual, semi-annual, or quarterly. It can also include monthly, daily, or even continuously (as in the case of continuous compounding), making statement A untrue.

Question 20

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

Accepted Answer

The interest rate for compounding significantly affects the accumulation of wealth within an annuity because it determines how much the invested money grows over time. Higher interest rates lead to more significant growth due to compounding.

Quiz 5: Time Value of Money 2: Analyzing Annuity Cash Flows