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Discounted Cash Flow Valuation
I.
DEFINITIONS
Topic: ANNUITY
1.
An annuity stream of cash flow payments is:
A)
A set of level cash flows occurring each time period for a fixed length of time.
B)
A set of level cash flows occurring each time period forever.
C)
A set of increasing cash flows occurring each time period for a fixed length of
time.
D)
A set of increasing cash flows occurring each time period forever.
E)
A set of arbitrary cash flows occurring each time period for no more than 10
years.
Answer: A
Topic: PRESENT VALUE FACTOR FOR ANNUITIES
2.
The present value factor for annuities is calculated as:
A)
(1 + present value factor)/r
B)
(1 – present value factor)/r
C)
Present value factor + (1/r)
D)
(Present value factor*r) + (1/r)
Answer: B
Topic: FUTURE VALUE FACTOR FOR ANNUITIES
3.
The future value factor for annuities is calculated as:
A)
Future value factor + r
B)
(1/r) + (future value factor*r)
C)
(1/r) + future value factor
D)
(Future value factor – 1)/r
E)
(Future value factor + 1)/r
Answer: D
Topic: ANNUITIES DUE
4.
Annuities where the payments occur at the end of each time period are called
___________, whereas __________ refer to annuity streams with payments occuring at the
beginning of each time period.
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
Answer: E

Topic: PERPETUITY
5.
An annuity stream where the payments occur forever is called a(n)
____________.
A)
annuity due
B)
indemnity
C)
perpetuity
D)
amortized cash flow stream
E)
amortization table
Answer: C
Topic: STATED INTEREST RATES
6.
The interest rate expressed in terms of the interest payment made each period is
called the:
A)
Stated interest rate.
B)
Compound interest rate.
C)
Effective annual rate.
D)
Periodic interest rate.
E)
Daily interest rate.
Answer: A
Topic: EFFECTIVE ANNUAL RATE
7.
The interest rate expressed as if it were compounded once per year is called the:
A)
Stated interest rate.
B)
Compound interest rate.
C)
Effective annual rate.
D)
Periodic interest rate.
E)
Daily interest rate.
Answer: C
Topic: ANNUAL PERCENTAGE RATE
8.
The interest rate charged per period multiplied by the number of periods per year
is called the:
A)
Effective annual rate (EAR).
B)
Annual percentage rate (APR).
C)
Periodic interest rate.
D)
Compound interest rate.
E)
Daily interest rate.
Answer: B
Topic: PURE DISCOUNT LOAN
9.
A loan where the borrower receives money today and repays a single lump sum at
some time in the future is called a(n) _____________ loan.
A)
amortized
B)
continuous
C)
balloon
D)
pure discount

E)
interest-only
Answer: D

Topic: INTEREST-ONLY LOAN
10.
A loan where the borrower pays interest each period and repays the entire
principal of the loan at some point in the future is called a(n) _________ loan.
A)

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