When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan. ANS: F DIF: Medium TOP: Amortization The effective annual rate is always greater than the simple rate as a result of compounding effects. ANS: F DIF: Medium TOP: Effective and simple rates Because we usually assume positive interest rates in time value analyses, the present value of a three-year annuity will always be less than the future value of a single lump sum, if the annuity payment equals the original lump sum investment. ANS: F DIF: Medium TOP: Lump sum and annuity All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the sooner the dollar is received the more quickly it can be invested to earn a positive return. ANS: T DIF: Medium TOP: Time value concepts An annuity is a series of equal payments made at fixed equal-length intervals for a specified number of periods. ANS: T DIF: Medium TOP: Annuities The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity due earns interest for one additional year (period). ANS: T DIF: Medium TOP: Annuities The difference between the PV of an annuity due and the PV of an ordinary annuity is that each of the payments of the annuity due is discounted by one more year. ANS: T DIF: Medium TOP: Annuities The effective annual rate is less than the simple rate when we have monthly compounding. ANS: F DIF: Medium TOP: Effective annual rate MULTIPLE CHOICE Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will a. Be higher. b. Be lower. c. Stay the same. d. Cannot tell. e. Be variable. ANS: B DIF: Easy OBJ: TYPE: Conceptual TOP: PV of a sum You have determined the profitability of a planned project by finding the present value of all the cash flows form that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan. ANS: F DIF: Medium TOP: Amortization The effective annual rate is always greater than the simple rate as a result of compounding effects. ANS: F DIF: Medium TOP: Effective and simple rates Because we usually assume positive interest rates in time value analyses, the present value of a three-year annuity will always be less than the future value of a single lump sum, if the annuity payment equals the original lump sum investment. ANS: F DIF: Medium TOP: Lump sum and annuity All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the sooner the dollar is received the more quickly it can be invested to earn a positive return. ANS: T DIF: Medium TOP: Time value concepts An annuity is a series of equal payments made at fixed equal-length intervals for a specified number of periods. ANS: T DIF: Medium TOP: Annuities The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity due earns interest for one additional year (period). ANS: T DIF: Medium TOP: Annuities The difference between the PV of an annuity due and the PV of an ordinary annuity is that each of the payments of the annuity due is discounted by one more year. ANS: T DIF: Medium TOP: Annuities The effective annual rate is less than the simple rate when we have monthly compounding. ANS: F DIF: Medium TOP: Effective annual rate MULTIPLE CHOICE Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will a. Be higher. b. Be lower. c. Stay the same. d. Cannot tell. e. Be variable. ANS: B DIF: Easy OBJ: TYPE: Conceptual TOP: PV of a sum You have determined the profitability of a planned project by finding the present value of all the cash flows form that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
FIN2601-ch003.docx