Question 1

The present value of an annuity:

Accepted Answer

The answer of The present value of an annuity:
...

Question 2

The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n):

Accepted Answer

An ordinary annuity refers to equal payments or receipts, made at the end of each period, for a specified duration. Annuity due refers to payments or receipts made at the beginning of each period, perpetuity refers to payments or receipts continuing indefinitely, and simple interest refers to interest calculated only on the principal amount. Therefore, choice C is the best answer for the given scenario.

Question 3

The more frequent the compounding the:

Accepted Answer

The more frequent the compounding, the more times the interest is added to the account during the year, resulting in a higher effective interest rate. Therefore, choice C is correct. Choices A and D are incorrect because the frequency of compounding does not affect the present value or future value of an account, all else being equal. Choice B is also incorrect because the amount deposited is not directly related to the frequency of compounding.

Question 4

The annual effective rate of interest is a function of:

Accepted Answer

The annual effective rate of interest is determined by both the annual nominal rate of interest and the number of compounding intervals per year. Therefore, choices A and B are both necessary for calculating the annual effective rate. Choice C is not relevant to the calculation of the annual effective rate of interest.

Question 5

When a loan is amortized over a five year term, the:

Accepted Answer

When a loan is amortized, the amount of interest paid is gradually reduced over time. This means that more of the payment goes towards paying off the principal balance each year, resulting in the loan being paid off in full by the end of the term. The rate of interest and the payment amount may remain constant throughout the term of the loan, depending on the terms of the loan agreement. Option A is incorrect because the rate of interest may or may not change over the five year term. Option C is also incorrect because while the total amount paid towards the loan may decrease over time, this does not necessarily mean that the payment amount will decrease each year. Option D is incorrect because an amortized loan is paid off gradually over time and does not involve a balloon payment.

Question 6

When using a future value of an annuity table:

Accepted Answer

A) The future value of an annuity table assumes payments are made at the end of each period.
B) The FVFA (future value of an annuity) factors increase with an increase in the interest rate. This is because as the interest rate increases, the present value of each payment increases, which leads to a higher future value.
C) The FVFA factors also increase with an increase in the number of periods. This is because more payments are being made, and each payment contributes to the total future value.

Question 7

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases?

Accepted Answer

The present value of the lottery winnings is based on the interest rate used to discount the future payments. As the interest rate increases, the present value decreases, making the winnings worth less.

Question 8

Holding all other variables constant, an increase in the ____ will increase the future value of an annuity.

Accepted Answer

An increase in the annuity payment, rate of interest, or number of periods will all increase the future value of an annuity, as each factor directly contributes to the growth of the annuity's value over time.

Question 9

More frequent compounding results in ____ future values and ____ present values than less frequent compounding at the same nominal interest rate.

Accepted Answer

More frequent compounding increases the future value because interest is being added to the principal more often, allowing interest to be earned on interest more frequently. However, it results in lower present values because a given future amount discounts to a smaller present value when interest is compounded more frequently at the same nominal rate.

Question 10

Which of the following is most correct?

Accepted Answer

An annuity due has payments at the beginning of each period, so its present and future values are higher than those of an ordinary annuity, where payments are made at the end of each period.

Question 11

Finding the discounted value of $1,000 to be received at the end of each of the next five years requires calculating the:

Accepted Answer

To find the discounted value of a series of future payments, we need to calculate the present value of an annuity. The present value represents the current value of the payments, taking into account the time value of money and discounting them back to their current value.

Question 12

Which of the following phrases would not be utilized if the payments were an annuity due?

Accepted Answer

End-of-period payments refer to payments that are made at the end of each period. In the case of an annuity due, payments are made at the beginning of each period. Therefore, the phrase "end-of-period payments" would not be utilized if the payments were an annuity due.

Question 13

The effective rate of interest will always be ____ the nominal rate.

Accepted Answer

The effective rate of interest takes into account the compounding effect within a given period, which can make it equal to or greater than the nominal rate, depending on the frequency of compounding.

Question 14

The present value factor for an annuity:

Accepted Answer

The present value factor for an annuity is typically less than the number of years in the annuity because it discounts future cash flows to their present value.

Question 15

The ____ of a resource is the benefit that would have been available from its next best use.

Accepted Answer

The definition given in the question describes the concept of opportunity cost. Present value and future value are related to financial calculations and do not fit the definition given.

Question 16

If the interest rate is 6%, which expression will determine the appropriate price to pay for a business that you expect to earn $5,000 in each of the next ten years and be sold for $25,000 in the eleventh year.

Accepted Answer

The correct expression uses the Present Value of an Annuity formula (PVFA) for the $5,000 annual earnings over 10 years and the Present Value formula (PVF) for the $25,000 to be received in the 11th year, both discounted at a 6% interest rate.

Question 17

You expect to receive $1,000 at the end of each of the next three years that you plan to deposit in a bank account paying 6%. Which of the following expressions will calculate your bank balance just after the last payment is deposited?

Accepted Answer

All of the expressions will calculate the future value of the three payments.

Question 18

The present value of an annuity will be decreased by:

Accepted Answer

The answer of The present value of an annuity will...

Question 19

When using a present value of an annuity table:

Accepted Answer

B) PVFA factors decrease with an increase in the interest rate: This is because a higher interest rate means that future payments are worth less in today's dollars.
C) PVFA factors increase with an increase in the number of periods: This is because more periods means more payments, which increases the total value of the annuity.

Question 20

Interest rates are quoted by stating the ____ followed by the compounding period.

Accepted Answer

Nominal rate is the stated interest rate without taking into account compounding, whereas effective annual rate takes into account compounding. Yield and coupon rate are specific to bonds and do not necessarily involve compounding. Therefore, the best choice is B.

Quiz 6: Time Value of Money