CHAPTER 4 REVU QUIZ PROBLEMS: 1.

Nico is the new assistant branch manager of a larger Florida-based bank and the branch manager has asked him a question to test his knowledge. The question he asked is which rate should the bank advertise on monthlycompounded loans, the nominal annual percentage rate or the effective annual percentage rate? Which rate should the bank advertise on quarterly-compounded savings accounts? Explain. As a consumer, which would you prefer to see and why?

MULTIPLE CHOICE: 1. a. b. c. d. What is the term used to describe an annuity with an infinite life? perpetuity infinuity infinity due There is no special term for an infinite annuity.

2. The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called A) future value. B) present value. C) future value of an annuity. D) present value of an annuity.

3. Indicate which of the following is true about annuities. A) An ordinary annuity is an equal payment paid or received at the beginning of each period. B) An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period. C) An annuity due is an equal payment paid or received at the beginning of each period. D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.

4. The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ________ interest rate. A) effective B) nominal C) discounted D) continuous

5. If the present value of a perpetual income stream is increasing, the discount rate must be A) increasing. B) decreasing. C) changing unpredictably. D) increasing proportionally.

6 . As the discount rate becomes higher and higher, the present value of inflows approaches A. 0 B. minus infinity C. plus infinity D. need more information

7. Why is the present value of an amount to be received (paid) in the future less than the future amount? a. Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year. b. Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future. c. Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted. d. Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future. e. None of the above is a correct answer. 8 . As the interest rate increases, the present value of an amount to be received at the end of a fixed period A. increases. B. decreases. C. remains the same. D. Not enough information to tell.

9 . As the time period until receipt increases, the present value of an amount at a fixed interest rate A. decreases. B. remains the same. C. increases. D. Not enough information to tell.

10. The shorter the length of time between a present value and its corresponding future value, A. the lower the present value, relative to the future value. B. the higher the present value, relative to the future value. C. the higher the interest rate used in the present-valuation. D. none of these.

ANSWERS PROBLEMS: Answer: A bank would rather advertise the annual percentage rate on loans since this rate appears to be lower and the effective annual rate. With respect to savings accounts, the bank would rather advertise the effective rate since this rate will be higher than the annual percentage rate with compounding frequency greater than annually. As a consumer, the effective rate is the more important rate since it represents the rate actually paid or earned.

MULTIPLE CHOICE: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. A B C A B A B B A B