Sample_Questions-chapter4

# Sample_Questions-chapter4 - Sample Questions Chapter 4 1 An...

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Sample Questions – Chapter 4 1. An annuity stream of cash flow payments is a set of: a a. level cash flows occurring each time period for a fixed length of time. b. level cash flows occurring each time period forever. c. increasing cash flows occurring each time period for a fixed length of time. d. increasing cash flows occurring each time period forever. e. arbitrary cash flows occurring each time period for no more than 10 years. 2. Annuities where the payments occur at the end of each time period are called _____ , whereas _____ refer to annuity streams with payments occurring at the beginning of each time period. e a. ordinary annuities; early annuities b. late annuities; straight annuities c. straight annuities; late annuities d. annuities due; ordinary annuities e. ordinary annuities; annuities due 3. You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with \$20,000 of income. Option A pays five annual payments starting with \$8,000 the first year followed by four annual payments of \$3,000 each. Option B pays five annual payments of \$4,000 each. Which one of the following statements is correct given these two investment options? b a. Both options are of equal value given that they both provide \$20,000 of income. b. Option A is the better choice of the two given any positive rate of return. c. Option B has a higher present value than option A given a positive rate of return. d. Option B has a lower future value at year 5 than option A given a zero rate of return. e. Option A is preferable because it is an annuity due. 4. Which of the following statements concerning the effective annual rate are correct? c I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates. II. The more frequently interest is compounded, the higher the effective annual rate. III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily. IV. When borrowing and choosing which loan to accept, you should select the offer with the highest effective annual rate. a.

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Sample_Questions-chapter4 - Sample Questions Chapter 4 1 An...

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