Saturday, September 7, 2013

Chapter 5 M/C and T/F Questions

1. What is another name for the process in determining the present value of an income stream by applying appropriate time value of money concepts?
a. Periodic Annual Rate

b. Effective Annual Rate

c. Discounting

d. Compounding

2. If the calculations assume that the cash flows are paid at the beginning of each period, the annuity would be referred to as an:
a. annuity due

b. cash flow input

c. ordinary

d. deferred

3. What kind of interest is computed on the principal of a loan?
a. Simple

b. Compound

c. Annual percentage rate

d. Effective Annual Rate

4. What kind of interest is computed on the accumulated loan interest as well as the principal?
a. Simple Interest

b. Compound Interest

c. Annual percentage rate

d. Effective Annual Rate

5. Cash flows realized at the present time have a greater value to investors than cash flows realized later, for which of the following reasons:
a. Inflation where the purchase power of money declines over time

b. Risk in not knowing if the cash flow that is expected will come to fruition

c. Spending money now is worth more than deferring the spending for later.

d. All of the above

6. If the payments occur at the end of each period, as they typically do, the annuity is an  
a. Ordinary annuity

b. Deferred annunity

c. Neither a or b

d. Both a and b

7. The process of determining future value is called compounding? 


8. When trying to find PV, FV, i or n in a ‘time value’ calculation, if three of the four variables are known, you would be able to find the fourth? 

Ans: 1) c, 2) a, 3) a, 4) b, 5) d, 6) d, 7) True, 8) True

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