Question 1

An amortization schedule is a table that calculates the interest and principal payments along with the remaining balance of the loan for each period.

Accepted Answer

This is correct, an amortization schedule is a table that outlines the various components of a loan payment over its lifetime.

Question 2

The CUMIPMT and CUMPRINC return a positive value by default.

Accepted Answer

CUMIPMT and CUMPRINC return a negative value by default because they represent payments made (outflows) from the perspective of the borrower.

Question 3

An amortization table shows the interest rate for each payment.

Accepted Answer

An amortization table shows the breakdown of each payment into principal and interest, not the interest rate for each payment. The interest rate itself typically remains constant throughout the term of a fixed-rate loan, although the dollar amount allocated to interest versus principal changes over time.

Question 4

The NPER function can be useful if you do not have all the information you need to calculate loan payments with the PMT function or you would like to verify the actual interest rate of the loan.

Accepted Answer

The NPER function is used to calculate the number of periods for a loan or investment based on constant payments and a constant interest rate, not to verify the actual interest rate of the loan. The RATE function is used to determine the interest rate.

Question 5

The type argument is used in the PMT function and is an optional argument.

Accepted Answer

The type argument is an optional argument in the PMT function. It is used to specify whether the payments are due at the beginning or end of a period. If the type argument is not provided, it is assumed to be 0, which means the payments are due at the end of the period.

Question 6

Each loan payment in an amortized loan is made up of a principal amount and an interest amount.

Accepted Answer

This is correct. In an amortized loan, each payment is typically divided between paying off a portion of the principal balance of the loan and paying the interest that has accrued on the principal balance.

Question 7

An alternative method to using the negative sign to make the result positive is to use the ABS function.

Accepted Answer

The ABS function (short for absolute value) converts a negative number to its positive equivalent, so it can be used to achieve the same result as using the negative sign.

Question 8

Interest and principal make up EVERY payment in an amortization table.

Accepted Answer

Every loan payment in an amortization table includes both interest and principal, with the amount of each changing over time as the loan is paid off.

Question 9

The PMT function equals the sum of the IPMT and PPMT results.

Accepted Answer

The PMT function in Excel calculates the total payment for a loan based on a constant interest rate, constant payments, and a constant loan amount. The IPMT function calculates the interest portion of a payment, while the PPMT function calculates the principal portion of a payment. Therefore, the sum of the IPMT and PPMT functions should equal the total payment calculated by the PMT function.

Question 10

The statement of cash flows can be used by banks to determine whether a company is eligible for a business loan.

Accepted Answer

The statement of cash flows provides important information about a company's cash inflows and outflows, which can be used by banks and other lenders to assess the company's liquidity and ability to repay a loan. Therefore, it can be an important factor in determining a company's eligibility for a business loan.

Question 11

The PPMT and IPMT functions use the same syntax.

Accepted Answer

Both the PPMT and IPMT functions use the same syntax, which includes the arguments for the rate, number of periods, present value, and optional future value and type arguments. The only difference between the two functions is that PPMT calculates the principal payment for a given period, while IPMT calculates the interest payment for a given period.

Question 12

When using the PMT function,you should type a negative sign in front of the present value of the loan so that the payment will result in a positive value.

Accepted Answer

This is because the PMT function calculates the payment as a negative value, so typing a negative sign in front of the present value ensures that the resulting payment value is positive.

Question 13

To calculate a loan payment for a mortgage loan with a monthly rate of 4%,you would enter .04 for the rate argument.

Accepted Answer

For a monthly rate, you would enter the annual interest rate divided by 12 (the number of months in a year). So for a 4% annual rate, you would enter 0.04/12 or 0.0033 as the rate argument.

Question 14

The CUMIPMT requires six arguments.

Accepted Answer

The CUMIPMT function requires six arguments: rate, nper, pv, start_period, end_period, and type.

Question 15

The CUMIPMT can be used to help calculate interest for a federal tax return.

Accepted Answer

The CUMIPMT function in Excel calculates the cumulative interest paid on a loan between two periods, which can be useful for determining the amount of interest paid in a tax year for a federal tax return.

Question 16

Incoming cash flows are "negative," whereas outgoing flows are "positive."

Accepted Answer

Incoming cash flows are considered "positive" because they represent money coming into the business, whereas outgoing flows are "negative" as they represent money being spent or leaving the business.

Question 17

By default,the PMT function returns a positive payment amount.

Accepted Answer

The PMT function in Excel returns a negative payment amount by default because it represents an outflow of money (e.g., paying a loan).

Question 18

The fv and type arguments for the PMT are considered optional arguments.

Accepted Answer

The fv and type arguments are considered optional arguments in the PMT function.

Question 19

The statement of cash flows can aid in determining whether a company is able to collect payments from customers and pay its bills.

Accepted Answer

The statement of cash flows gives a clear picture of a company's cash inflows and outflows over a period of time. This information can be used to determine the company's ability to collect payments from customers and pay its bills. For example, if a company has a positive net cash flow from operating activities, it indicates that it is able to generate sufficient cash from its operations to meet its financial obligations. On the other hand, if a company has a negative net cash flow from operating activities, it may indicate that it is facing difficulties in collecting payments from customers or managing its expenses. Therefore, the statement of cash flows can be a useful tool for analyzing a company's financial performance and identifying areas for improvement.

Question 20

As the total loan balance decreases,a larger proportion is applied to interest and a smaller proportion is applied to principal.

Accepted Answer

As the total loan balance decreases, a larger proportion is applied to principal and a smaller proportion is applied to interest due to the way that loan amortization schedules are structured.

Quiz 11: Loan Amortization, investment Analysis, and Asset Depreciation