Question 1

Which is the best deﬁnition of a stated interest rate or quoted interest rate?

Accepted Answer

A stated interest rate or quoted interest rate is the interest rate expressed in terms of the interest payment made each period. It is also known as the nominal rate or stated rate. It does not take into account the compounding of interest, which is reflected in the effective interest rate.

Question 2

Which is the best deﬁnition of an annuity?

Accepted Answer

An annuity is a level stream of cash flows for a fixed period of time. This means that the payments received or made are of the same amount and are made at equal intervals over a specified period of time. An annuity may be paid out at the beginning or end of the period, so option B is not a complete definition. Option A refers to the effective annual interest rate, which is not specific to annuities. Option D refers to the annual percentage rate (APR) and option E refers to the quoted interest rate, which are also not specific to annuities.

Question 3

You are planning to save your Christmas bonuses from work and are comparing savings accounts: Account A compounds semi-annually while account B compounds monthly. If both accounts have
The same effective annual rate of interest and you place only the bonuses in the account, you
Should choose ___________.

Accepted Answer

If both accounts have the same effective annual rate (EAR), the frequency of compounding does not matter, and you would be indifferent between the two accounts.

Question 4

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 8.5% compounded monthly. Loan B offers a rate of 8.9%
Compounded semi-annually. Loan _____ is the better offer because ______.

Accepted Answer

Loan A has a lower Effective Annual Rate (EAR) compared to Loan B, making it the better offer.

Question 5

Jamie is a self-employed consultant. A prospective client has offered her three payment options. Jamie is currently earning 8.5% on her funds. Which one of the following statements is correct
Concerning Jamie's payment options?
Option 1: $10,000 today plus $25,000 at the end of year 2
Option 2: $5,000 today plus $9,000 at the end of year 1 and $22,000 at the end of year 2
Option 3: $36,000 at the end of year 2

Accepted Answer

To determine the best payment option, we need to calculate the present value of each option using Jamie's current rate of return of 8.5%.

Option 1: PV = $10,000/(1+0.085)^1 + $25,000/(1+0.085)^2 = $30,809.95
Option 2: PV = $5,000/(1+0.085)^1 + $9,000/(1+0.085)^1 + $22,000/(1+0.085)^2 = $31,438.53
Option 3: PV = $36,000/(1+0.085)^2 = $30,940.19

Therefore, option 2 has the highest present value and is the best choice for Jamie. Option 1 has the second highest present value, and option 3 has the lowest present value.

Note that the other rate of returns mentioned in the answer choices do not result in the same best choice.

Question 6

Which is the best deﬁnition of a growing perpetuity?

Accepted Answer

A growing perpetuity is a series of cash flows that continues indefinitely and is expected to increase over time. This is different from a regular perpetuity, which has a constant stream of cash flows. Therefore, option C is the best definition of a growing perpetuity.

Question 7

Which is the best deﬁnition of a growing annuity?

Accepted Answer

A growing annuity is defined as a series of cash flows that grow at a constant rate for a finite number of periods.

Question 8

The interest rate which lenders must report to borrowers as required by law is the:

Accepted Answer

The annual percentage rate (APR) is the interest rate that lenders are required to report to borrowers by law. This rate takes into account not only the interest charged but also any fees associated with the loan, such as origination fees or closing costs. The APR allows borrowers to compare loan options more accurately because it includes all the costs associated with the loan, not just the simple interest rate.

Question 9

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded semi-annually.
Which would you choose and why?

Accepted Answer

The answer of You have $500 that you would like...

Question 10

Which of the following comparison statements is true?

Accepted Answer

Both an annuity and a perpetuity involve payments of equal value, but they differ in duration; an annuity is for a fixed period, while a perpetuity lasts indefinitely.

Question 11

You have $2,500 that you want to use to open a savings account. You have found ﬁve different accounts that are acceptable to you. All you have to do now is determine which account you want
To use such that you can earn the highest rate of interest possible. Which account should you use
Based upon the annual percentage rates quoted by each bank?
Account A: 3.75%, compounded annually
Account B: 3.70%, compounded monthly
Account C: 3.70%, compounded semi-annually
Account D: 3.65%, compounded continuously
Account E: 3.66%, compounded quarterly

Accepted Answer

The answer of You have $2,500 that you want to...

Question 12

Which one of the following is true concerning amortized loans?

Accepted Answer

Amortized loans are those in which the borrower pays equal periodic (monthly, quarterly, or annually) payments, which include interest payments and a portion of principal repayment. Each payment reduces the outstanding balance of the loan. Thus, at the end of the loan term, the loan is completely paid off. A balloon payment refers to a large lump sum payment due at the end of the loan term, which is not present in amortized loans. Option C is incorrect because it states that amortized loan payments consist of interest only, whereas principal repayment is also included in the payment. Option D is incorrect as it implies that an amortized loan requires only one payment at the end of the loan term, which is not the case. Option E is incorrect because pure discount loans do not involve periodic payments, and the entire interest and principal are paid at maturity.

Question 13

Which one of the following is a correct deﬁnition?

Accepted Answer

An ordinary annuity is a stream of equal payments which occur at the end of each time period. This is the correct definition.

Option A is incorrect as perpetuities have an infinite stream of equal payments, not unequal.

Option C is incorrect as an annuity due has equal payments that occur at the beginning of each time period, not unequal.

Option D is incorrect as a perpetuity has an infinite stream of equal payments, not a limited period.

Option E is incorrect as a perpetuity has an infinite stream of equal payments, not a series of payments over a limited period.

Question 14

Which one of the following is correct concerning ordinary annuities and annuities due?

Accepted Answer

An annuity due will have a larger future value than an ordinary annuity because payments are made at the beginning of each period, allowing more time for each payment to earn interest.

Question 15

Which is the best deﬁnition of an annuity due?

Accepted Answer

An annuity due is a type of annuity for which the cash flows occur at the beginning of the period, as opposed to at the end of the period (which is the case for a regular annuity). The other definitions do not accurately reflect the characteristics of an annuity due.

Question 16

A loan 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.

Accepted Answer

The answer of A loan where the borrower pays interest...

Question 17

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45% compounded daily. Loan B offers a rate of 7.5%
Compounded semi-annually. Loan _____ is the better offer because ______

Accepted Answer

Loan B is the better offer because it has a higher effective annual rate of 7.64% compared to Loan A's effective annual rate of 7.53%. This takes into account the compounding period and gives a more accurate representation of the true cost of borrowing. While Loan B has a slightly higher nominal rate, it compounds less frequently (semi-annually) compared to Loan A's daily compounding, which reduces the overall cost of borrowing. Therefore, Loan B is the better choice.

Question 18

Which is the best deﬁnition of an effective annual rate?

Accepted Answer

An effective annual rate is the interest rate expressed as if it were compounded once per year. This takes into account the effect of compounding on the interest earned over the course of a year. Option A is the formula for nominal annual rate, option B is referring to the timing of cash flows, option C is referring to an annuity, and option E is referring to a quoted interest rate.

Question 19

Which is the best deﬁnition of an annual percentage rate?

Accepted Answer

The annual percentage rate (APR) is the interest rate charged per period multiplied by the number of periods per year.

Question 20

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded monthly. Which
Would you choose and why?

Accepted Answer

Savings account B has a higher effective annual rate due to the monthly compounding, which results in a 7.98% effective annual rate compared to the 8% effective annual rate of savings account A. Therefore, choosing savings account B would result in a higher return on the investment.

Quiz 6: Discounted Cash Flow Valuation

Which is the best deﬁnition of a stated interest rate or quoted interest rate?

Which is the best deﬁnition of an annuity?

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 8.5% compounded monthly. Loan B offers a rate of 8.9% Compounded semi-annually. Loan _ is the better offer because __.

Which is the best deﬁnition of a growing perpetuity?

Which is the best deﬁnition of a growing annuity?

The interest rate which lenders must report to borrowers as required by law is the:

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded semi-annually. Which would you choose and why?

Which of the following comparison statements is true?

Which one of the following is true concerning amortized loans?

Which one of the following is a correct deﬁnition?

Which one of the following is correct concerning ordinary annuities and annuities due?

Which is the best deﬁnition of an annuity due?

A loan 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.

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45% compounded daily. Loan B offers a rate of 7.5% Compounded semi-annually. Loan _ is the better offer because __

Which is the best deﬁnition of an effective annual rate?

Which is the best deﬁnition of an annual percentage rate?

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded monthly. Which Would you choose and why?

Quiz 6: Discounted Cash Flow Valuation

Which is the best deﬁnition of a stated interest rate or quoted interest rate?

Which is the best deﬁnition of an annuity?

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 8.5% compounded monthly. Loan B offers a rate of 8.9% Compounded semi-annually. Loan _____ is the better offer because ______.

Which is the best deﬁnition of a growing perpetuity?

Which is the best deﬁnition of a growing annuity?

The interest rate which lenders must report to borrowers as required by law is the:

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded semi-annually. Which would you choose and why?

Which of the following comparison statements is true?

Which one of the following is true concerning amortized loans?

Which one of the following is a correct deﬁnition?

Which one of the following is correct concerning ordinary annuities and annuities due?

Which is the best deﬁnition of an annuity due?

A loan 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.

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45% compounded daily. Loan B offers a rate of 7.5% Compounded semi-annually. Loan _____ is the better offer because ______

Which is the best deﬁnition of an effective annual rate?

Which is the best deﬁnition of an annual percentage rate?

You have $500 that you would like to invest. You have two choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.75% compounded monthly. Which Would you choose and why?

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 8.5% compounded monthly. Loan B offers a rate of 8.9% Compounded semi-annually. Loan _ is the better offer because __.

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45% compounded daily. Loan B offers a rate of 7.5% Compounded semi-annually. Loan _ is the better offer because __