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Unformatted text preview: TRUE/FALSE 1. Cash flow time lines are used primarily for decisions involving paying off debt or investing in financial securities. They cannot be used when making decisions about investments in physical assets. ANS: F DIF: Easy TOP: Cash flow time lines 2. One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest. ANS: T DIF: Easy TOP: Retirement and compounding 3. Of all the techniques used in finance, the least important is the concept of the time value of money. ANS: F DIF: Easy TOP: Time value concepts 4. Compounding is the process of converting today's values, which are termed present value, to future value. ANS: T DIF: Easy TOP: Compounding 5. The coupon rate is the rate of return you could earn on alternative investments of similar risk. ANS: F DIF: Easy TOP: Coupon rate 6. A perpetuity is an annuity with perpetual payments. ANS: T DIF: Easy TOP: Perpetuity 7. An amortized loan is a loan that requires equal payments over its life; its payments include both interest and repayment of the debt. ANS: T DIF: Easy TOP: Amortization 8. The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity. ANS: F DIF: Medium TOP: Compounding 9. Suppose an investor can earn a steady 5% annually with investment A, while investment B will yield a constant 12% annually. Within 11 years time, the compounded value of investment B will be more than twice the compounded value of investment A (ignore risk). ANS: T DIF: Medium TOP: Comparative compounding 10. Solving for the interest rate associated with a stream of uneven cash flows, without the use of a calculator, usually involves a trial and error process. ANS: T DIF: Medium TOP: Uneven cash flows and interest 11. When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan. ANS: F DIF: Medium TOP: Amortization 12. The effective annual rate is always greater than the simple rate as a result of compounding effects. ANS: F DIF: Medium TOP: Effective and simple rates 13. Because we usually assume positive interest rates in time value analyses, the present value of a three-year annuity will always be less than the future value of a single lump sum, if the annuity payment equals the original lump sum investment. ANS: F DIF: Medium TOP: Lump sum and annuity 14. All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the sooner the dollar is received the more quickly it can be invested to earn a positive return....
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- Spring '08