Finance Exam 2 (multiple choice )

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

Annuity due

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely with the first scholarship one year from today. These annual scholarships are:

A Perpetuity

The stated interest rate is the interest rate expressed:

In terms of the interest payment made each period.

All else held constant, the present value of an annuity will decrease if you:

Decrease the annuity payment

Which one of these is a perpetuity?

Trust income of $1,200 a year forever

Which one of the following statements concerning annuities is correct?

An annuity due has payments that occur at the beginning of each time period

All else held constant, the future value of an annuity will increase if you:

Increase the time period

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

Annuity B has both a higher present value and a higher future value than Annuity A

Which one of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments

A 30-year home mortgage is a classic example of

An ordinary annuity

You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?

The present value of the perpetuity must be higher than the present value of either the ordinary annuity or the annuity due

Which one of the following has the highest effective annual rate?

6 percent compounded daily

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account

Will be greater than 12.9 percent

Which one of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must

Charge interest annually

Which one of the following qualifies as an annuity payment?

Auto loan payment