CHAPTER 6Discounted Cash Flow ValuationI.DEFINITIONSANNUITYa1.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 ANNUITIESb2.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 ANNUITIESd3.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 DUEe4.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 annuitiesb.late annuities; straight annuitiesc.straight annuities; late annuitiesd.annuities due; ordinary annuitiese.ordinary annuities; annuities duePERPETUITYc5.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 RATESa6.The interest rate expressed in terms of the interest payment made each period is called the _ rate.a.stated interestb.compound interestc.effective annuald.periodic intereste.daily interestEFFECTIVE ANNUALRATEc7.The interest rate expressed as if it were compounded once per year is called the _ rate.a.stated interestb.compound interestc.effective annuald.periodic intereste.daily interestANNUAL PERCENTAGE RATEb8.The interest rate charged per period multiplied by the number of periods per year is called the _ rate.a.effective annualb.annual percentagec.periodic interestd.compound intereste.daily interestPURE DISCOUNT LOANd9.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.amortizedb.continuousc.balloond.pure discounte.interest-onlyINTEREST-ONLY LOANe10.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.amortizedb.continuousc.balloond.pure discounte.interest-onlyAMORTIZED LOANa11.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.amortizedb.continuousc.balloond.pure discounte.interest-onlyBALLOON LOANc12.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.amortizedb.continuousc.balloond.pure discounte.interest-onlyII.CONCEPTSORDINARY ANNUITY VERSUS ANNUITY DUEc13.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.Annuity B has a higher present value than annuity A.e.Both annuities have the same future value as of ten years from today.UNEVENCASH FLOWS ANDPRESENT VALUEb14.You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays fiveannual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?a.Both options are of equal value given that they both provide $20,000 of income.b.Option A is the better choice of the two given any positive rate of return.c.Option B has a higher present value than option A given a positive rate of return.d.Option B has a lower future value at year 5 than option A given a zero rate of return.e.Option A is preferable because it is an annuity due.UNEVENCA