CH.

5 FIN MAN T/F

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1.

All other things held constant, the present value of a

given annual annuity decreases as the number of
periods per year increases.

TRUE

9.

a. True
b. False
2.

All other things held constant, the present value of a

given annual annuity increases as the number of
periods per year increases.

As a result of compounding, the effective annual rate

on a bank deposit (or a loan) is always equal to or
greater than the nominal rate on the deposit (or
loan).

FALSE

10.

As a result of compounding, the effective annual rate

on a bank deposit (or a loan) is always equal to or
less than the nominal rate on the deposit (or loan).

TRUE

11.

Disregarding risk, if money has time value, it is

impossible for the future value of a given sum to
exceed its present value.

FALSE

12.

Disregarding risk, if money has time value, it is

impossible for the present value of a given sum to
exceed its future value.

FALSE
13.

The greater the number of compounding periods

within a year, then (1) the greater the future value of
a lump sum investment at Time 0 and (2) the greater
the present value of a given lump sum to be received
at some future date.

14.

FALSE

The greater the number of compounding periods

within a year, then (1) the greater the future value of
a lump sum investment at Time 0 and (2) the smaller
the present value of a given lump sum to be received
at some future date.
a. True
b. False

TRUE

If the discount (or interest) rate is positive, the

present value of an expected series of payments
will always exceed the future value of the same
series.

FALSE

If we are given a periodic interest rate, say a

monthly rate, we can find the nominal annual rate
by dividing the periodic rate by the number of
periods per year.

If we are given a periodic interest rate, say a

monthly rate, we can find the nominal annual rate
by multiplying the periodic rate by the number of
periods per year.

TRUE

a. True
b. False
15.

a. True
b. False
8.

TRUE

a. True
b. False

TRUE

a. True
b. False
7.

If the discount (or interest) rate is positive, the

future value of an expected series of payments will
always exceed the present value of the same
series.

a. True
b. False

a. True
b. False
6.

FALSE

a. True
b. False

a. True
b. False
5.

If a bank compounds savings accounts quarterly,

the nominal rate will exceed the effective annual
rate.
a. True
b. False

a. True
b. False
4.

TRUE

a. True
b. False

a. True
b. False
3.

If a bank compounds savings accounts quarterly,

the effective annual rate will exceed the nominal
rate.

Midway through the life of an amortized loan, the

percentage of the payment that represents interest
could be equal to, less than, or greater than to the
percentage that represents repayment of principal.
The proportions depend on the original life of the
loan and the interest rate.
a. True
b. False

16.

Midway through the life of an amortized loan, the

percentage of the payment that represents interest
must be equal to the percentage that represents
repayment of principal. This is true regardless of
the original life of the loan or the interest rate on
the loan.

FALSE

24.

The payment made each period on an amortized

loan is constant, and it consists of some interest
and some principal. The closer we are to the end of
the loan's life, the greater the percentage of the
payment that will be a repayment of principal.

25.

TRUE

The payment made each period on an amortized

loan is constant, and it consists of some interest
and some principal. The closer we are to the end of
the loan's life, the smaller the percentage of the
payment that will be a repayment of principal.

26.

FALSE

a. True
b. False
19.

The present value of a future sum decreases as

either the discount rate or the number of periods
per year increases, other things held constant.

The present value of a future sum increases as

either the discount rate or the number of periods
per year increases, other things held constant.

TRUE

Some of the cash flows shown on a time line can be

in the form of annuity payments but none can be
uneven amounts.

Some of the cash flows shown on a time line can be

in the form of annuity payments while others can be
uneven amounts.

28.

Starting to invest early for retirement increases the

benefits of compound interest.
a. True
b. False

TRUE

A time line is meaningful even if all cash flows do

not occur annually.

TRUE

A time line is not meaningful unless all cash flows

occur annually.

FALSE

a. True
b. False
29.

FALSE

Time lines can be constructed for annuities where

the payments occur at either the beginning or the
end of the periods.

TRUE

a. True
b. False
30.

TRUE

Time lines can be constructed in situations where

some of the cash flows occur annually but others
occur quarterly.

TRUE

a. True
b. False

a. True
b. False
23.

27.

FALSE

a. True
b. False
22.

Suppose Sally Smith plans to invest $1,000. She

can earn an effective annual rate of 5% on Security
A, while Security B has an effective annual rate of
12%. After 11 years, the compounded value of
Security B should be more than twice the
compounded value of Security A. (Ignore risk, and
assume that compounding occurs annually.)

a. True
b. False

a. True
b. False
21.

FALSE

a. True
b. False

a. True
b. False
20.

Suppose Randy Jones plans to invest $1,000. He

can earn an effective annual rate of 5% on Security
A, while Security B has an effective annual rate of
12%. After 11 years, the compounded value of
Security B should be somewhat less than twice the
compounded value of Security A. (Ignore risk, and
assume that compounding occurs annually.)
a. True
b. False

a. True
b. False
18.

FALSE

a. True
b. False

a. True
b. False
17.

Starting to invest early for retirement reduces the

benefits of compound interest.

31.

TRUE

Time lines cannot be constructed for annuities

unless all the payments occur at the end of the
periods.
a. True
b. False

FALSE

32.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

FALSE

a. True
b. False
33.

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the
early years, and the principal repayment's percentage declines in the loan's later years.

FALSE

a. True
b. False
34.

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early
years, and the principal repayment's percentage increases in the loan's later years.
a. True
b. False

TRUE