Reference no: EM131495258
Part I. (Sentence Correction) All of the following statements are false. Please change the incorrect parts to make them true. DO NOT negate the sentence, unless necessary.
1. The process of earning interest on prior interest earnings is called discounting.
2. The process of determining how much a given future value is worth today is called compounding.
3. All else equal, the higher the interest rate is, the lower the future value (of a lump sum investment) is.
4. All else equal, the longer you have your lump sum cash flow invested, the lower the future value is.
5. All else equal, the higher the interest rate is, the higher the present value (of a lump sum investment) is.
6. Given an interest rate of zero percent, the future value (of a lump sum investment) will always decrease if the investment time period is lengthened.
7. Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be an example of perpetuity.
8. Janis just won a scholarship that will pay her $500 a month, starting today and continuing for the next 48 months. The payments will be given every 1st day of the month. Her scholarship is an example of ordinary annuity.
9. The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. The fund is an example of annuity due.
10. Anna pays 1.5 percent interest a year, but compounded on a monthly basis, on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the annual percentage rate.
11. Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the effective annual rate.
12. Unequal payments each year for nine years, such as your medical bills, can be classified as an annuity.
13. Equal payments each year for nine years, such as your auto loan payment, can be classified as a perpetuity.
14. All else equal, the more frequent compounding, the higher the present value.
15. The Men's Warehouse charges 1.6 percent interest per month. The effective annual rate is 19.2 percent, and the annual percentage rate is 20.98 percent.