Question 1

Holding all other variables constant, payment per period for an annuity due will be higher than an ordinary annuity.

Accepted Answer

In an annuity due, payments are made at the beginning of each period, which means each payment has more time to earn interest compared to an ordinary annuity where payments are made at the end of each period. Therefore, to achieve the same future value, the payment per period for an annuity due will be lower than for an ordinary annuity, assuming the interest rate and total number of payments remain constant.

Question 2

The present value of an annuity increases as the discount rate increases.

Accepted Answer

The present value of an annuity decreases as the discount rate increases.

Question 3

An annuity involves depositing or investing a single sum of money and allowing it to grow for a certain number of years.

Accepted Answer

An annuity typically involves making a series of payments over time, rather than depositing or investing a single sum of money.

Question 4

An amortized loan is a loan paid in unequal installments.

Accepted Answer

An amortized loan is a loan with equal installments over a fixed period of time, where each installment pays off a portion of the principal and interest. The goal is to have the loan fully paid off by the end of the term.

Question 5

What is a series of equal payments for an infinite period of time called?

Accepted Answer

A perpetuity is a constant stream of cash flows with no end date, making it an infinite series. This best describes the situation presented in the question. An annuity, on the other hand, has a finite end date for the payments. A cash cow refers to a profitable business, while an axiom is a self-evident truth that does not pertain to financial concepts.

Question 6

When repaying an amortized loan, the interest payments increase over time.

Accepted Answer

When repaying an amortized loan, the interest payments decrease over time as the principal balance decreases.

Question 7

You are saving money to buy a house. You will need $7,473.50 to make the down payment. If you can deposit $500 per month in a savings account which pays 1% per month, how long will it take you to save the $7,473.50?

Accepted Answer

The answer of You are saving money to buy a...

Question 8

You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?

Accepted Answer

The rate of return on preferred stock can be calculated using the formula: Dividend/Price. In this case, the dividend is $5.50 and the price is $50. Dividing the dividend by the price gives a rate of return of 11%. Therefore, the best choice is C.

Question 9

If you have an opportunity cost of 10%, how much must you invest each year to have $4,000 accumulated in 10 years?

Accepted Answer

The answer of If you have an opportunity cost of...

Question 10

You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate, compounded monthly. Create an amortization schedule for the first two months of the loan.

Accepted Answer

The answer of You have borrowed $70,000 to buy a...

Question 11

What is a series of equal payments to be received at the beginning of each period, for a finite period of time, called?

Accepted Answer

A series of equal payments to be received at the beginning of each period, for a finite period of time, is called an annuity due.

Question 12

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

Accepted Answer

An annuity involves a series of equal payments made or received at regular intervals, such as monthly or annually.

Question 13

A loan amortization schedule provides a breakdown of loan payments into principal and interest payments.

Accepted Answer

A loan amortization schedule shows the allocation of payments between principal and interest over the life of a loan.

Question 14

You have just received an endowment of $32,976. You plan to put the entire amount in an account earning 8 percent compounded annually and to withdraw $4000 at the end of each year. How many years can you continue to make the withdrawals?

Accepted Answer

The answer of You have just received an endowment of...

Question 15

To repay a $2,000 loan from your bank, you promise to make equal payments every six months for the next five years totaling $3,116.20. What annual rate of interest will you be paying?

Accepted Answer

The answer of To repay a $2,000 loan from your...

Question 16

You have a credit card with a balance of $18,000. The annual interest rate on the card is 18% compounded monthly, and the minimum payment is $400 per month. If you pay only the minimum payment each month and do not make any new charges on the card, how many years will it take for you to pay off the $18,000 balance?

Accepted Answer

The answer of You have a credit card with a...

Question 17

You have just purchased a car from Friendly Sam. The selling price of the car is $6,500. If you pay $500 down, then your monthly payments are $317.22. The annual interest rate is 24%. How many payments must you make?

Accepted Answer

The answer of You have just purchased a car from...

Question 18

a.) If Sparco, Inc. deposits $150 at the end of each year for the next eight years in an account that pays 5% interest, how much money will Sparco have at the end of eight years?
b.) Suppose Sparco decides that they need to have $5,300 at the end of the eight years. How much will they have to deposit at the end of each year?

Accepted Answer

The answer of a.) If Sparco, Inc. deposits $150 at...

Question 19

We can use the present value of an annuity formula to calculate constant annual loan payments.

Accepted Answer

The present value of an annuity formula can be used to calculate constant annual loan payments, as it is essentially finding the present value of a series of cash flows (the loan payments) that occur at the same time interval (annually).

Question 20

The present value of a perpetuity decreases when the ________ decreases.

Accepted Answer

The answer of The present value of a perpetuity decreases...

Quiz 6: The Time Value of Money-Annuities and Other Topics