Multiple Choice Questions

Which of the following characteristics apply to a perpetuity?I. Constant cash flow dollar amountII. Unequal cash flow dollar amountIII. Limited time periodIV. Infinite time period
  • pure discount
  • I and IV only
  • I and III only
  • interest-only
Lee pays 1 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:
  • effective annual rate
  • charge interest annually.
  • annual percentage rate
  • pure discount loan.
Which one of the following can be classified as an annuity but not as a perpetuity?
  • Timing of the annuity payments
  • amortized
  • perpetuity
  • Equal annual payments for life
Which one of the following statements is true concerning annuities?
  • All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
  • The EAR, rather than the APR, should be used to compare both investment and loan options.
  • An annuity due has payments that occur at the beginning of each time period.
  • $25 paid weekly for 1 year, starting one week from today
Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?
  • I and IV only
  • amortized
  • I and III only
  • interest-only
Which one of the following is an example of a perpetuity?
  • decrease in the annuity payment
  • 6 percent compounded monthly
  • Trust income of $1,200 a year forever
  • Future value of a perpetuity
A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:
  • charge interest annually.
  • decrease in the annuity payment
  • Timing of the annuity payments
  • higher effective annual rate
You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?
  • The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due
  • to compute the initial loan amount, you must use a monthly interest rate
  • An annuity due has payments that occur at the beginning of each time period.
  • Annuity B has both a higher present value and a higher future value than Annuity A.
Which one of the following statements is correct?
  • An annuity due has payments that occur at the beginning of each time period.
  • The EAR, rather than the APR, should be used to compare both investment and loan options.
  • All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
  • $25 paid weekly for 1 year, starting one week from today
Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?
  • I and III only
  • pure discount
  • I and IV only
  • pure discount loan.
Which one of the following has the highest effective annual rate?
  • 6 percent compounded monthly
  • decrease in the annuity payment
  • Future value of a perpetuity
  • Trust income of $1,200 a year forever
Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:
  • effective annual rate
  • annual percentage rate
  • pure discount loan.
  • annuity due
Which one of the following statements concerning annuities is correct?
  • $25 paid weekly for 1 year, starting one week from today
  • An annuity due has payments that occur at the beginning of each time period.
  • All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
  • decrease in the annuity payment
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?
  • interest-only
  • I and III only
  • I and IV only
  • annuity due
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?
  • amortized
  • interest-only
  • annuity
  • I and IV only
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
  • will be greater than 12.9 percent
  • decrease in the annuity payment
  • annual percentage rate
  • Timing of the annuity payments
You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?
  • to compute the initial loan amount, you must use a monthly interest rate
  • The EAR, rather than the APR, should be used to compare both investment and loan options.
  • Annuity B has both a higher present value and a higher future value than Annuity A.
  • The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due
Which one of the following will decrease the present value of an annuity?
  • Trust income of $1,200 a year forever
  • 6 percent compounded monthly
  • decrease in the annuity payment
  • Timing of the annuity payments
When comparing savings accounts, you should select the account that has the:
  • decrease in the annuity payment
  • higher effective annual rate
  • 6 percent compounded monthly
  • Timing of the annuity payments
Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?
  • annuity due
  • interest-only
  • annuity
  • amortized
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?
  • amortized
  • interest-only
  • annuity
  • perpetuity
A perpetuity in Canada is frequently referred to as which one of the following?
  • annuity
  • annuity due
  • consul
  • charge interest annually.
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?
  • amortized
  • perpetuity
  • interest-only
  • annuity
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Multiple Choice Questions
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