BFIN Exam 1

Discount Rate

a. The interest rate used to discount future cash flows to their present value
b. The rate of return you could earn on an alternative investment of similar risk
c. The process of finding the present value of a cash flow or a series of cash flows
d. The amount of cash flows or series of cash flows will grow over a period of time when
compounded at a given rate
e. None of these

The interest rate used to discount future cash flows to their present value

APR
a. The actual interest charge on a loan or credit card
b. The contracted interest rate on a credit card or loan. Also known as the stated interest rate
c. The rate of return you could earn on an alternative investment with similar risk
d. A series of equal payments
e. None of these

The contracted interest rate on a credit card or loan. Also known as the stated interest rate

Compound Interest
a. Future interest is earned only principal
b. The rate of return you could earn on an alternative investment of similar risk
c. A series of equal payments at a fixed intervals for a specified number of periods
d. Future interest is earned on principal and on interest received
e. None of these

Future interest is earned on principal and on interest received

Amortized Loan
a. The process of finding the present value of a series of cash flows
b. The future value of an annuity over a fixed number of periods
c. A loan that is repaid in equal payments over its life
d. The rate of return you could earn on an alternative investment
e. None of these

A loan that is repaid in equal payments over its life

Discounting
a. The process of finding the present value of a cash flow or a series of cash flows
b. A series of equal payments at fixed intervals for a specific number of periods
c. The process of determining the final value of a cash flow or a series of cash flows when
compound interest is applied
d. Occurs when interest is not earned on interest
e. None of these

The process of finding the present value of a cash flow or a series of cash flows

Periodic Interest rate
a. The amount of interest charged each period during the year
b. The rate of return you could earn on an alternative investment of similar risk
c. A stream of equal payments at fixed intervals expected to continue forever
d. The contracted interest rate
e. None of these

The amount of interest charged each period during the year

EAR
a. The contracted interest rate
b. The process of determining the final value of a cash flow or series of cash
c. flows when interest is added once a year
d. Used to compare alternative investments with different compounding period
e. The interest earned only on original interest

Used to compare alternative investments with different compounding period

Which of the following is an example of an annuity?
a. Corporate profits
b. Land value
c. Endowment
d. Rent Payments
e. None of these

Rent Payments

Which of the following is an example of a perpetuity?
a. Mortgage
b. Student loans
c. Consul Bonds
d. Certificate of Deposit
e. None of these

Consul Bonds

Which of the following is an example of a perpetuity?
a. Mortgage
b. Student loans
c. Consul Bonds
d. Certificate of Deposit
e. None of these

Consul Bonds

You plan to analyze the value of an investment by determining the present value. Which of the
following would increase the present value of the investment?
a. The total amount of cash flows remains the same, but the cash will be received a later date
b. The total amount of cash flow is reduced by 50%
c. The total amount of cash flow remains the same, but the cash will be received sooner than
originally projected
d. The total amount and timing of cash flows remain the same, but the discount rate used to
calculate the present value of the investment increases
e. None of these

The total amount of cash flow remains the same, but the cash will be received sooner than
originally projected

Which of the following is most accurate regarding the principal of an amortizing loan?
a. The percent of the payment that goes towards paying down principal is higher earlier in
the loan’s life than later
b. Payments made on an amortizing loan are always 90% allocated towards principal
c. Interest paid each period is higher earlier in the loan’s life than later
d. Principal is finite series of equal payments occurring on regular intervals
e. None of these

Interest paid each period is higher earlier in the loan’s life than later