Question 1

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 is commonly used to calculate constant annual loan payments, making option A correct.

Question 2

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

Accepted Answer

Annuities involve making equal periodic payments or withdrawals of a set amount of money.

Question 3

You are saving money to buy a house.You will need $7,473.50 to pay the deposit.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 4

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 5

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 the end...

Question 6

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

Accepted Answer

A loan amortisation schedule provides details of each loan payment, including how much of the payment goes towards paying off the principal amount of the loan and how much goes towards paying the interest charged on the loan.

Question 7

You have just purchased a share of preferred stock for $50.00.The preference shares pay an annual dividend of $5.50 per share forever.What is the rate of return on your investment?
A).055
B).010
C).110
D).220

Accepted Answer

The rate of return on the investment can be calculated as (Annual Dividend/Investment), which in this case is (5.50/50) = 0.11 or 11%. Therefore, the correct choice is C) 0.11 or 11%.

Question 8

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 9

If the annual interest rate is 10%,how much must you invest each year to have $4,000 accumulated in 10 years?

Accepted Answer

The answer of If the annual interest rate is 10%,how...

Question 10

The present value of a perpetuity decreases when the ________ decreases.
A)number of investment periods
B)annual discount rate
C)perpetuity payment
D)both B and C

Accepted Answer

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

Question 11

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

Accepted Answer

When repaying an amortised loan, the interest payments decrease over time as the balance owed decreases.

Question 12

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 13

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. As the discount rate increases, the value of money in the future decreases, leading to a lower present value for the annuity.

Question 14

An amortised loan is a loan paid in unequal installments.

Accepted Answer

An amortised loan is a loan paid in equal installments, which includes both the principal and interest.

Question 15

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 16

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

Accepted Answer

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

Question 17

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 18

What is a series of equal payments for an infinite period of time called?
A)A level perpetuity
B)A growing perpetuity
C)An ordinary annuity
D)An annuity due

Accepted Answer

A level perpetuity involves a series of equal payments that continue indefinitely, making it perpetual. The payments remain the same over time, and there is no specified end date.

Question 19

What is a series of equal payments to be received at the beginning of each period,for a finite period of time,called?
A)A perpetuity
B)An annuity due
C)An ordinary annuity
D)A growing annuity

Accepted Answer

An annuity due involves equal payments made at the beginning of each period, while an ordinary annuity involves payments made at the end of each period. A perpetuity involves equal payments made indefinitely, and a growing annuity involves payments that increase over time. Therefore, the best choice for a series of equal payments to be received at the beginning of each period, for a finite period of time, is an annuity due.

Question 20

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

Accepted Answer

An ordinary annuity involves depositing or investing a series of equal payments at regular intervals for a certain number of years.

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