Corporate Finance Homework 5
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These are the homework questions for Chapter 5 in Corporate Finance.
- 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.Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
- 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.Which one of the following statements is correct?
- 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.
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