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ADMS 3530 Chapter Notes - Chapter 5: Nominal Interest Rate, Real Interest Rate, Interest

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School
York University
Department
Administrative Studies
Course
ADMS 3530
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Professor

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Document Summary

Perpetuity and ordinary annuity formulas assume that the first payment occurs at the end of the period. Annuities due: level stream of cash flows starting immediately (at the beginning) Growing perpetuity: an infinite stream of cash flows growing at a constant rate. Growing annuity: a finite stream of cash flows growing. Future value does not have perpetuity as there is no end date to the stream. Inflation: rate at which prices as a whole are increasing. (if inflation rate is 5% per year, then goods that cost a year ago cost . 05) We need to earn a return that is greater than the rate of inflation. Consumer price index (cpi): measure the number of dollars that it takes to buy a specified basket of goods and services (represents a typical family"s purchases) Percentage increase in cpi from one year to the next measures the rate of inflation. Real value of : purchasing-power-adjusted value of a dollar.

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Related Questions

Question:- 1) Which one of the following statements is true about an amortized loan? A. With an amortized loan, a smaller proportion of each month’s payment goes toward interest in the early periods. B With an amortized loan, a bigger proportion of each month’s payment goes toward interest in the later periods. C. With an amortized loan, a bigger proportion of each month’s payment goes toward interest in the early periods. D With an amortized loan, the proportion of the loan that goes toward interest does not change at any point. Question:- 2) Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called: A. an annuity due. B. a growing perpetuity. C. an ordinary annuity. D. a growing annuity. Question 3) If your investment pays the same amount at the end of each year forever, the cash flow stream is called: A. an ordinary annuity. B. a perpetuity. C. an annuity due. D. none of the above. Question:- 4) Use the following table to calculate the expected return for the asset. Return Probability 0.10 0.30 0.20 0.50 0.25 0.25 A. 15.0% B. 17.5% C. 18.75% D. 19.25%

You are evaluating an investment that will pay ​$70 in 1​ year,and it will continue to make payments at annual intervals​thereafter, but the payments will grow by 3​% forever.

a. What is the present value of the first ​$70 payment if thediscount rate is 11​%?

b. How much cash will this investment pay 100 years from​ now?What is the present value of the 100th​ payment? Again use a 11​%discount rate.

c. What is the present value of the entire growing stream ofperpetual cash​ flows?

d. Explain why the answers to parts a and b help to explain whyan infinite stream of growing cash flows has a finite presentvalue.

Question 1 5 pts

0 multiple_choice_question 22046808

The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.

The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.

zero
one
one hundred
none of the above

Question 2 5 pts

On a timeline, the space between date 0 and date 1 represents the _______ between dates. Let’s assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.

On a timeline, the space between date 0 and date 1 represents the _______ between dates. Let’s assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.

dollar amount
present value
time period
future value

Question 3 5 pts

As the interest rate __________, present value decreases.

As the interest rate __________, present value decreases.

decreases
increases
remains unchanged
is unrelated

Question 4 5 pts

The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow

The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow

difference between
product of
sum of
same as

Question 5 5 pts

When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.

When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.

annuity
perpetuity
interest payment
principle payment

Question 6 5 pts

Edit this Question Delete this Question

0 multiple_choice_question 22047052

There are two basic types of annuities:

There are two basic types of annuities:

Discounted and compounded annuities
Ordinary annuities and annuities due.
Future value and present value annuities
None of the above

Question 7 5 pts

The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.

The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.

consistent
dollar
annual
semi-annual

Question 8 5 pts

The Net Present Value rule implies that we should compare a project’s net present value (NPV) to ________

The Net Present Value rule implies that we should compare a project’s net present value (NPV) to ________

zero
one
100
none of the above

Question 9 5 pts

To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one year’s time, how much will you need to donate to endow the party?

The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =

To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one year’s time, how much will you need to donate to endow the party?

The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =

$3,750
$37,500
$375,000
$3,750,000

Question 10 5 pts

With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.

With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.

beginning
middle
end
payments are not required