10 Questions

These are the homework questions for Chapter 5 in Corporate Finance.

Questions and Answers

- 1.Travis is buying a car and will finance it with a loan which requires monthly payments of $265 for the next 4 years. His car payments can be described by which one of the following terms?
- A.
Annuity

- B.
Lump sum

- C.
Factor

- D.
Consol

- E.
Perpetuity

- 2.The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?
- A.
Annuity due

- B.
Continuation

- C.
Ordinary annuity

- D.
Amortized payment

- E.
Perpetuity

- 3.
- A.
Effective annual rate.

- B.
Perpetual rate.

- C.
Simple rate.

- D.
Annual percentage rate.

- E.
Compounded rate.

- 4.Which one of the following statements concerning annuities is correct?
- A.
The present value of an annuity is equal to the cash flow amount divided by the discount rate.

- B.
An annuity due has payments that occur at the beginning of each time period.

- C.
If unspecified, you should assume an annuity is an annuity due.

- D.
The future value of an annuity decreases as the interest rate increases.

- E.
An annuity is an unending stream of equal payments occurring at equal intervals of time.

- 5.Which one of the following qualifies as an annuity?
- A.
Auto loan payment

- B.
Medical bills

- C.
Clothing purchases

- D.
Car repairs

- E.
Weekly grocery bill

- 6.Which one of the following features distinguishes an ordinary annuity from an annuity due?
- A.
Annuity interest rate

- B.
Frequency of the payments

- C.
Amount of each payment

- D.
Number of equal payments

- E.
Timing of the annuity payments

- 7.Which one of the following is an ordinary annuity, but not a perpetuity?
- A.
$40 paid quarterly for five years, starting today

- B.
$25 paid weekly for one year, starting one week from today

- C.
$50 paid every year for ten years, starting today

- D.
$15 paid at the end of each monthly period for an infinite period of time

- E.
$75 paid at the beginning of each month period for 50 years

- 8.Which one of the following has the highest effective annual rate?
- A.
6 percent compounded quarterly

- B.
6 percent compounded monthly

- C.
All the other answers have the same effective annual rate.

- D.
6 percent compounded annually

- E.
6 percent compounded semi-anually

- 9.When comparing savings accounts, you should select the account that has the:
- A.
Highest effective annual rate.

- B.
Highest stated rate.

- C.
Lowest effective annual rate.

- D.
Highest annual percent rate.

- E.
Lowest annual percentage rate.

- 10.
- A.
The APR is equal to the EAR for a loan that charges interest monthly.

- B.
The APR is the best measure of the actual rate you are paying on a loan.

- C.
The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1.

- D.
The EAR is always greater than the APR.

- E.
The EAR, rather than the APR, should be used to compare both investment and loan options.