WEEK 2

Question 1

Compounding?

Answer 1

The process of leaving the money in the financial market and lending it for another year

Question 2

R squared

Answer 2

interest on interest

Question 3

interest rate

Answer 3

R = PV / C - 1

Question 4

2 x r

Answer 4

means that theres simple interest over 2 years

Question 5

FV? 4% interest rate, £ 3 and 4 years

Answer 5

FV = £ PV x (1 + 0.04 (interest value)) squared by the time, eg 4

Question 6

The term ‘C’ within the present value formula stands for?

Answer 6

the future cash flow

Question 7

Interest is not reinvested with?

Answer 7

simple interest

Question 8

The term ‘r’ within a present value or future value calculation represents:

Answer 8

the interest rate per period

Question 9

Present value analysis and future value analysis must

Answer 9

Always lead to the same decision

Question 10

Finding the present value needed to reach a specific future value at a given interest rate r is done by simply

Answer 10

dividing the future value by (1+r) raised to the power of T, where T is the number of periods.

Question 11

Simple interest

Answer 11

Interest is earned on the principal only.

Question 12

Compound interest

Answer 12

Interest is earned on the interest as well as the principal.

Question 13

The information that is incorporated within the future value table is:

Answer 13

interest rate and the number of periods

Question 14

What will be the value of €10,000 in 20 years from now if the annual interest rate is 5% and simple interest is applied so that interest is withdrawn annually and not compounded?

Answer 14

Reason: (€10,000 x 5% x 20) + €10,000 = €20,000

Question 15

With compound interest, the investment proceeds would be greater than they would be in the case of simple interest because

Answer 15

interest received on interest

Question 16

Interest paid twice a year is known as?

Answer 16

semi-annual compounding

Question 17

An investor deposits £10,000 in the bank for 12 months at an interest rate of 4% p.a. compounded semi-annually. How much is the investor’s end-of-year wealth?

Answer 17

Reason: 10,000 x (1 + 0.042
)2 = £10,404

divided by 2 and squared by 2

Question 18

The future value of £100 at 10% compounded semi-annually is?

Answer 18

greater than the future value of £100 at 10% compounded annually.

Question 19

The present value of a set of cash flows is

Answer 19

the sum of the present values of the individual cash flows.

the sum of the discounted future values of the individual cash flows.

Question 20

An investor deposits £10,000 in the bank for 12 months at an interest rate of 4% p.a. compounded quarterly. How much is the investor’s end-of-year wealth?

Answer 20

Reason: £10,000x(1+ 0.044
)4 = £10,406

divided by 4 and squared by 4

Question 21

Semi-annual compounding means that interest is paid

Answer 21

2 times per year

Question 22

The term ‘m’ within the compounding formula represents:

Answer 22

the number of times interest is compounded during the year

Question 23

What is the difference in the future value of £100 at 7% interest for 5 years if the interest is compounded semi-annually rather than annually?

Answer 23

Reason: (£100 × 1.035 squared 10) - (£100 × 1.07 sqaured 5) = £0.80

Question 24

The annual interest rate without consideration of compounding is called the

Answer 24

stated annual interest rate

Question 25

For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is larger than the APR

Answer 25

BECAUSE ; For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always larger than the APR.

Question 26

If the frequency of compounding is given by m, the appropriate compounding formula for an investment (Co) over one or more years (T) is:

Answer 26

Co x (1+ rm)^(mT)

Question 27

The harmonized interest rate that expresses the total cost of borrowing is called the annual

Answer 27

% RATE

Question 28

When considering APR for the PV value, it actually represents:

Answer 28

APR actually becomes the new discount rate.

Question 29

The stated annual interest rate is the annual interest rate

Answer 29

without or before the consideration of compounding

Question 30

The effective annual yield (EAY) is also known as

Answer 30

It is also known as the effective annual rate (EAR).

Question 31

THE APR IN EU AND US IS?

Answer 31

The definition used in the European Union is very different from the one used in the US.

Question 32

A constant stream of cash without end is called

Answer 32

A perpetuit, Annuities are not forever.

Question 33

The APR express the?

Answer 33

total cost of borrowing. or investing

Question 34

An investor purchasing a consol is entitled to receive yearly interest from the British government for ever. true or false

Answer 34

true

Question 35

A perpetuity whose present value is £384 at an interest rate of 6% would generate an annual cash flow of:

Answer 35

C=PV x r = £384 x 6% = £23.04

Question 36

The cash flow stream that will rise at a certain percentage every year indefinitely is called

Answer 36

growing perpetuity

Question 37

A perpetuity currently making an annual payment of £32 and which is expected to grow at 4% p.a. while the interest rate is 7.5% p.a. would have a present value of:

Answer 37

Reason: PV=32x(1.04)0.075−0.04 =950.86

Question 38

The present value of a perpetuity providing an annual cash flow of £28 at an interest rate of 5.5% would be:

Answer 38

reason: PV= 285.5% =£509.09

Question 39

The future value of an annuity that makes an annual payment of £14 for 10 years at an interest rate of 6% would be:

Answer 39

Reason: FV=14 x (1+6%)10−16% =184.53

Question 40

An annuity due is an annuity where the first payment begins

Answer 40

today

Question 41

Calculate the present value of an annuity of £1 for 10 years if the interest rate per year is 10%.

Answer 41

Reason: £1[1/.1-1/(.1(1.1)^10)] = £6.14.

Question 42

An ordinary annuity is sometimes called an annuity in

Answer 42

arrears

Question 44

What is the difference between an ordinary annuity and an annuity due?

Answer 44

An ordinary annuity has payments made at the end of each period, while an annuity due has payments made at the beginning of each period.

Question 45

What does the present value formula for an annuity assume about the start of cash flows?

Answer 45

It assumes that the stream of cash flows starts 1 period from now.

Question 46

How is the present value of an annuity due calculated?

Answer 46

Use the present value formula for an ordinary annuity and multiply by (1+r).

Question 47

What is compound interest?

Answer 47

Interest earned on interest.

Question 48

What is simple interest?

Answer 48

Interest earned only on the original investment.

Question 49

What is the future value of an annuity?

Answer 49

The value of the stream of cash flows at the end of the time period.

Question 50

What is present value?

Answer 50

Value today of a future cash flow.

Question 51

What is the relationship between present values of ordinary annuities and annuities due?

Answer 51

Present value of an annuity due is calculated as the present value of an ordinary annuity multiplied by (1+r).

Question 52

What is a perpetuity?

Answer 52

A stream of cash flows that lasts forever.

Question 53

Fill in the blank: The formula for a growing perpetuity includes a growth rate denoted by _______.

Answer 53

[g]

Question 54

What factors affect the future value sensitivity of an annuity?

Answer 54

Interest rate and time.

Question 55

True or False: The present value of a stream of cash flows equals the sum of the present value of each cash flow.

Answer 55

True.

Question 56

What is the formula for calculating the future value of an annuity?

Answer 56

Calculate the future value of each cash flow and sum them.

Question 57

What is the discount factor?

Answer 57

Present value of a £1 future payment.

Question 58

What is the effect of compounding on interest rates?

Answer 58

Compounding results in interest being earned on previously earned interest.

Question 59

How to find the interest rate from the present value and future value?

Answer 59

Use the formula relating FV, PV, r, and t.

Question 60

What is the appropriate monthly mortgage payment for a house costing £250,000 with a 20% down payment and a 0.41667% monthly interest rate?

Answer 60

Calculation required based on loan terms.

Question 61

What is the price of a computer if you pay a deposit of £100 and make two future payments of £250 and £120 at an interest rate of 4%?

Answer 61

Calculation required based on future payments.

Question 62

How long will it take to double your money at an interest rate of 4%?

Answer 62

Calculation required using the formula PV, FV, r, and t.

Question 63

If you deposit £3000 at the end of every year for 4 years at an interest rate of 8%, how much will you have at the end?

Answer 63

Calculation required based on annuity future value.

Question 64

What is the future value of £100 after 1 year at an interest rate of 6%?

Answer 64

Calculation required based on simple interest.

Question 65

What is the cash flow for a growing annuity?

Answer 65

Cash flows grow at a constant rate g.

Question 66

Fill in the blank: The formula gives us the value of a regular stream of payments starting _______ from now.

Answer 66

[1 period]