# Chapter 7 Interest Rates and Bond Valuation

**Topics:**Time value of money, Interest, Compound interest

**Pages:**40 (9043 words)

**Published:**April 27, 2012

Discounted Cash Flow Valuation

I.DEFINITIONS

ANNUITY

a1.An annuity stream of cash flow payments is a set of:

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.

PRESENT VALUE FACTOR FOR ANNUITIES

b2.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).

e.r (1 + present value factor).

FUTURE VALUE FACTOR FOR ANNUITIES

d3.The future value factor for annuities is calculated as the:

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.

ANNUITIES DUE

e4.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.

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

PERPETUITY

c5.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.

STATED INTEREST RATES

a6.The interest rate expressed in terms of the interest payment made each period is called the _____ rate.

a.stated interest

b.compound interest

c.effective annual

d.periodic interest

e.daily interest

EFFECTIVE ANNUAL RATE

c7.The interest rate expressed as if it were compounded once per year is called the _____ rate.

a.stated interest

b.compound interest

c.effective annual

d.periodic interest

e.daily interest

ANNUAL PERCENTAGE RATE

b8.The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

a.effective annual

b.annual percentage

c.periodic interest

d.compound interest

e.daily interest

PURE DISCOUNT LOAN

d9.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

INTEREST-ONLY LOAN

e10.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.amortized

b.continuous

c.balloon

d.pure discount

e.interest-only

AMORTIZED LOAN

a11.A loan where the borrower pays interest each period, and repays some or all of the principal of the loan over time is called a(n) _____ loan.

a.amortized

b.continuous

c.balloon

d.pure discount

e.interest-only

BALLOON LOAN

c12.A loan where the borrower pays interest each period, repays part of the principal of the loan over time, and repays the remainder of the principal at the end of the loan, is called a(n) _____ loan.

a.amortized

b.continuous

c.balloon

d.pure discount

e.interest-only

II.CONCEPTS

ORDINARY ANNUITY VERSUS ANNUITY DUE

c13.You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the

first of each month while annuity B pays on the last day of each month. Which one of

the following statements is correct concerning these two annuities?

a.Both annuities are of equal value today.

b.Annuity B is an annuity due.

c.Annuity A has a higher future value than annuity B.

d....

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