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**Unformatted text preview: **CHAPTER 5 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. ...

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