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

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 because it calculates the present value of a series of equal payments. By solving for the present value of the loan payments, we can determine the amount of the loan that needs to be financed initially. This then allows for the calculation of the constant annual loan payments needed to pay off the loan over the designated period of time.

Question 3

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?
A).055
B).010
C).110
D).220

Accepted Answer

Rate of return can be calculated as the dividend per share divided by the purchase price per share, expressed as a percentage. 
Dividend per share = $5.50 
Purchase price per share = $50.00 
Rate of return = ($5.50/$50.00) x 100% = 11% 
Therefore, the rate of return on the investment is 11%, which is option C.

Question 4

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 5

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 6

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 7

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

Accepted Answer

This is true for regular/level payment annuities. Variable payment annuities may have varying payment amounts.

Question 8

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)A cash cow
D)A deferred annuity

Accepted Answer

An annuity due is a series of equal payments to be received at the beginning of each period, for a finite period of time. A perpetuity is a series of equal payments that continues indefinitely, a cash cow refers to a consistently profitable business or investment, and a deferred annuity has payments that are postponed until a specified future date.

Question 9

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 10

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 balance of the loan decreases.

Question 11

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 12

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 13

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 14

What is a series of equal payments for an infinite period of time called?
A)A perpetuity
B)An axiom
C)A cash cow
D)An annuity

Accepted Answer

A series of equal payments for an infinite period of time is called a perpetuity. An annuity is a series of equal payments for a fixed period of time, while an axiom is a self-evident statement or principle. "Cash cow" is a term used to describe a company, product, or investment that generates large amounts of consistent cash flow.

Question 15

An amortized loan is a loan paid in unequal installments.

Accepted Answer

An amortized loan is a loan paid in equal installments, with each installment covering both the principal and interest.

Question 16

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 17

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

Accepted Answer

The answer of A compound annuity involves depositing or investing...

Question 18

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 19

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 20

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

Accepted Answer

A loan amortization schedule shows the proportion of each loan payment that goes toward paying down the principal balance of the loan and the interest charges. It typically includes information about the amount borrowed, the interest rate, the payment frequency, and the total number of payments needed to repay the loan. The schedule can be helpful for tracking the progress of loan repayment and for understanding how changes in interest rates or payment amounts affect the overall cost of borrowing.

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