Question 1

Nominal dollars refer to the amount of purchasing power.

Accepted Answer

Nominal dollars refer to the current dollar amount without adjusting for inflation, not directly to purchasing power.

Question 2

If you were a bank which would you quote, the nominal interest rate or the effective annual interest rate? Why?

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The answer of If you were a bank which would...

Question 3

Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?

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The answer of Why is it difficult and perhaps risky...

Question 4

Discuss the statement, "Money has a time value."

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Question 5

What three pieces of information do you need to calculate the future value of an annuity?

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The answer of What three pieces of information do you...

Question 6

Discuss the statement, "It is always preferred to select an account that offers compound interest over an account that offers simple interest."

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The answer of Discuss the statement, "It is always preferred...

Question 7

An annual percentage rate (APR) is determined by annualizing the rate using compound interest.

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The answer of An annual percentage rate (APR) is determined...

Question 8

Explain the difference between a regular annuity and an annuity due.

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Question 9

Prizes are often not "worth" as much as claimed.Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today.Assume an interest rate of 7 percent over the 20 years.

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The answer of Prizes are often not "worth" as much...

Question 10

Would you prefer a savings account that paid 7 percent interest, compounded quarterly, over an account that paid 7.5 percent with annual compounding if you had $1,000 to deposit? Would the answer change if you had $100,000 to deposit?

Accepted Answer

The answer of Would you prefer a savings account that...

Question 11

Accrued interest declines with each payment on an amortizing loan.

Accepted Answer

Accrued interest is calculated based on the outstanding balance of the loan. As each payment is made, the outstanding balance decreases, which in turn reduces the amount of interest that accrues. Therefore, accrued interest declines with each payment on an amortizing loan.

Question 12

The more frequent the compounding, the higher the future value, other things being equal.

Accepted Answer

This is known as the "frequency effect" - the more times interest is compounded, the more interest you earn on your interest, resulting in a higher future value.

Question 13

The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates.

Accepted Answer

The appropriate manner of adjusting for inflationary effects is to discount real cash flows with real interest rates or to discount nominal cash flows with nominal interest rates.

Question 14

A loan officer states, "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at 9 percent interest versus a 15-year mortgage with 8.5 percent interest.Both mortgages are for $100,000 and have monthly payments.What is the difference in total dollars that will be paid to the lender under each loan?

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The answer of A loan officer states, "Thousands of dollars...

Question 15

Explain the difference between a very long annuity and a perpetuity.

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Question 16

Show numerically that a savings account with a current balance of $1,000 that earns interest at 9 percent annually is precisely sufficient to make the payments on a three-year loan of $1,000 that carries equal annual payments at 9 percent interest.

Accepted Answer

The answer of Show numerically that a savings account with...

Question 17

After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18 percent APR, or 1.5 percent per month.Now, to make you feel even worse, calculate the effective annual interest rate.

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The answer of After reading the fine print in your...

Question 18

What problem can be caused by "mixing" real and nominal cash flows in discounting exercises?

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Question 19

If four years of college is expected to cost $150,000 18 years from now, how much must be deposited now into an account that will average 8 percent annually in order to save the $150,000? By how much would your answer change if you expected 11 percent annually?

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The answer of If four years of college is expected...

Question 20

The term "constant dollars" refers to equal payments for amortizing a loan.

Accepted Answer

The term "constant dollars" actually refers to inflation-adjusted dollars, which reflect the purchasing power of a specific time period.

Quiz 5: The Time Value of Money