Module 1 Facts

.docx
School
Southwestern University **We aren't endorsed by this school
Course
ECONOMICS ECON
Subject
Finance
Date
Oct 14, 2023
Pages
2
Uploaded by lisalans2001 on coursehero.com
1. In the amortization of a mortgage loan with equal payments, the fraction of each payment devoted to interest steadily increases over time and the fraction devoted to reducing the loan balance decreases steadily. a. False 2. One can find the present value of a future cash flow by dividing it by an appropriate discount factor. a. False 3. A safe dollar is always worth less than a risky dollar because the rate of return on a safe investment is generally low and the rate of return on a risky investment is generally high. a. False 4. The managers of a firm can maximize stockholder wealth by: a. Taking all projects with positive NPVs. 5. Which of the following is generally considered an example of a perpetuity? a. Interest payments on a consol 6. A perpetuity is defined as a sequence of: a. Equal cash flows occurring at equal intervals of time forever 7. The concept of compound interest is best described as: a. Interest earned on interest. 8. An annuity is defined as a set of: a. Equal cash flows occurring at equal intervals of time for a specified period. 9. The opportunity cost of capital is higher for safe investments than for risky ones. a. False 10. A dollar today is worth more than a dollar tomorrow if the interest rate is positive. a. True 11. Which of the following statements is true? a. The process of discounting is the inverse of the process of compounding. 12. An annuity is an asset that pays a fixed amount each period for a specified number of periods. a. True 13. The calculation of compound interest assumes reinvestment of interest payments at the given rate of return. a. True 14. Generally, one should accept investments that offer rates of return in excess of their opportunity costs of capital. a. True 15. Present value is defined as a. Future cash flows discounted to the present by an appropriate discount rate. 16. The present value formula for a cash flow expected one period from now is:
a. PV = C 1 /(1 + r ) 17. An equal-payment home mortgage is an example of an annuity. a. True 18. The rate of return is also called the: i. I) discount rate ii. II) hurdle rate iii. III) opportunity cost of capital b. All three 19. The present value of a growing perpetuity, with cash flow C1 occurring one year from now, is given by: [ C 1 /( r - g )], where r > g . a. True 20. The value of a five-year annuity is equal to the sum of two perpetuities. One makes its first payment in year 1, and the other makes its first payment in year 6. a. False 21. The calculation of compound interest assumes reinvestment of interest payments at the given rate of return. a. True 22. The rate of return on any perpetuity is equal to its cash flow multiplied by its price. a. False
Page1of 2
Uploaded by lisalans2001 on coursehero.com