Chapter 3 Self Study Questions
True/False
Indicate whether the sentence or statement is true or false.
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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.
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2.
One of the potential benefits of investing early for retirement is that an investor can receive greater benefits
from the compounding of interest.
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3.
Of all the techniques used in finance, the least important is the concept of the time value of money.
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4.
The coupon rate is the rate of return you could earn on alternative investments of similar risk.
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5.
A perpetuity is an annuity with perpetual payments.
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6.
An amortized loan is a loan that requires equal payments over its life; its payments include both interest and
repayment of the debt.
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7.
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.
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8.
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).
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9.
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.
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10.
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.
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11.
The effective annual rate is always greater than the simple rate as a result of compounding effects.
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12.
Because we usually assume positive interest rates in time value analyses, the present value of a threeyear
annuity will always be less than the future value of a single lump sum, if the annuity payment equals the
original lump sum investment.
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13.
An annuity is a series of equal payments made at fixed equallength intervals for a specified number of
periods.
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14.
The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity
due earns interest for one additional year (period).
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15.
The difference between the PV of an annuity due and the PV of an ordinary annuity is that each of the
payments of the annuity due is discounted by one more year.
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16.
The effective annual rate is less than the simple rate when we have monthly compounding.
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17.
In six years time, you are scheduled to receive money from a trust established for you by your grandparents.
When the trust matures there will be $100,000 in the account. If the account earns 9 percent compounded
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 Three '09
 DUSA
 Finance, Debt, Investing

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