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Flashcards in Day 1 Deck (21):
1

An interest rate that has been annualised using compound interest is termed the...?

Effective annual interest rate

2

If interest is paid m times per year, then the per-period interest rate equals the:
a. effective annual rate divided by m.
b. compound interest rate times m.
c. effective annual rate.
d. annual percentage rate divided by m.

A. annual percentage rate divided by m.

3

In most cases it will save money for consumers to select their loans based on the lowest:
a. annual percentage rate.
b. effective annual rate.
c. number of compounding periods per year.
d. simple interest rate

b. effective annual rate

4

The concept of compound interest refers to:
a. earning interest on the original investment.
b. payment of interest on previously earned interest.
c. investing for a multi-year period of time.
d. determining the APR of the investment.

b. payment of interest on previously earned interest

5

Securities exchanges create efficient markets that do all of the following EXCEPT:

a. ensure a market in which the price reflects the appropriate value of the security.
b. allocate funds to the most productive uses.
c. bring together buyers and sellers while affording them anonymity.
d. control the supply and demand for securities through price
e. allow prices to move randomly

d. control the supply and demand for securities through price

6

Which of the following will increase the present value of an annuity, other things equal
a. Increasing the interest rate.
b. Decreasing the interest rate.
c. Decreasing the number of payments.
d. Decreasing the amount of the payment.

b. Decreasing the interest rate.

7

Which of the following statements best describes the real interest rate?
a. Real interest rates exceed inflation rates.
b. Real interest rates can decline only to zero.
c. Real interest rates can be negative, zero, or positive.
d. Real interest rates traditionally exceed nominal rates.

c. Real interest rates can be negative, zero, or positive.

8

What happens over time to the real cost of purchasing a home, if the mortgage payments are fixed in nominal terms and inflation is in existence?
a. The real cost is constant.
b. The real cost is increasing.
c. The real cost is decreasing.
d. The price index must be known to answer this question

c. The real cost is decreasing.

9

Which of the following characteristics applies to the amortization of the principal balance of a
loan such as a home mortgage?
a. The amortization decreases with each payment.
b. The amortization increases with each payment.
c. The amortization is constant throughout the loan.
d. The amortization fluctuates monthly with changes in interest rates.

b. The amortization increases with each payment.

10

The present value of a perpetuity can be determined by:
a. Multiplying the payment by the interest rate.
b. Dividing the interest rate by the payment.
c. Multiplying the payment by the number of payments to be made.
d. Dividing the payment by the interest rate

a. Multiplying the payment by the interest rate.

11

A stream of equal cash payments lasting forever is termed:
a. an annuity.
b. an annuity due.
c. an installment plan.
d. a perpetuity.

d. a perpetuity.

12

The theory that explains only the tendency for the yield curve to be upward sloping is the:
a. efficient market theory.
b. liquidity preference theory.
c. expectations theory.
d. market segmentation theory.
e. investor perception theory.

b. liquidity preference theory.

13

When an investment pays only simple interest, this means:
a. the interest rate is lower than on comparable investments.
b. the future value of the investment will be low.
c. the earned interest is non taxable to the investor.
d. interest is earned only on the original investment.

d. interest is earned only on the original investment

14

Cash flows occurring in different periods should not be compared unless:

a. interest rates are expected to be stable.
b. the flows occur no more than one year from each other.
c. high rates of interest can be earned on the flows
d. the flows have been discounted to a common date

d. the flows have been discounted to a common date

15

Correct formula to Determine the future amount
where there are an infinite number of interest periods
per annum?

Continuous Compounding

16

Correct formula to value a series of equal payments occuring at the start of each period?

Future value of annuity due formula

17

Correct formula to calculate the balance owing on a loan

Present value of annuity formula

18

For a term-loan amortisation schedule, what amount will increase each year until the loan matures?

a. The total payment each year.
b. That portion of the total payment that is interest.
c. That portion of the total payment that is the repayment of principal.
d. The remaining unpaid balance.
e. None of the above.

c. That portion of the total payment that is the repayment of principal.

19

In most cases it will save money for consumers to select their loans based on the lowest:

a. annual percentage rate.
b. effective annual rate.
c. number of compounding periods per year.
d. simple interest rate.

b. effective annual rate.

20

The theory that explains only the tendency for the yield curve to be upward sloping is the:

a. efficient market theory.
b. liquidity preference theory.
c. expectations theory.
d. market segmentation theory.
e. investor perception theory.

b. liquidity preference theory.

21

When an investment pays only simple interest, this means:

a. the interest rate is lower than on comparable investments.
b. the future value of the investment will be low.
c. the earned interest is non taxable to the investor.
d. interest is earned only on the original investment.

d. interest is earned only on the original investment.