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TVOM Theory Quiz

This document contains 5 multiple choice questions about financial concepts such as amortization, compound interest, annuities, and time value of money. The questions cover topics such as how the interest portion of mortgage payments changes over the life of the loan, how compounding affects interest rates, how the present and future values of ordinary vs. annuity due annuities compare, and how interest rates and loan terms impact the proportion of loan payments that go toward interest vs. principal.

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Kim Davillo
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79 views2 pages

TVOM Theory Quiz

This document contains 5 multiple choice questions about financial concepts such as amortization, compound interest, annuities, and time value of money. The questions cover topics such as how the interest portion of mortgage payments changes over the life of the loan, how compounding affects interest rates, how the present and future values of ordinary vs. annuity due annuities compare, and how interest rates and loan terms impact the proportion of loan payments that go toward interest vs. principal.

Uploaded by

Kim Davillo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Amortization Answer: e Diff: E

1. Frank Lewis has a 30-year, $100,000 mortgage with a nominal interest rate of 10
percent and monthly compounding. Which of the following statements regarding
his mortgage is most correct?

a. The monthly payments will decline over time.


b. The proportion of the monthly payment that represents interest will be lower for
the last payment than for the first payment on the loan.
c. The total dollar amount of principal being paid off each month gets larger as the
loan approaches maturity.
d. Statements a and c are correct.
e. Statements b and c are correct.

Quarterly compounding Answer: e Diff: E


2. Your bank account pays an 8 percent nominal rate of interest. The interest is
compounded quarterly. Which of the following statements is most correct?

a. The periodic rate of interest is 2 percent and the effective rate of interest is 4
percent.
b. The periodic rate of interest is 8 percent and the effective rate of interest is greater
than 8 percent.
c. The periodic rate of interest is 4 percent and the effective rate of interest is 8
percent.
d. The periodic rate of interest is 8 percent and the effective rate of interest is 8
percent.
e. The periodic rate of interest is 2 percent and the effective rate of interest is greater
than 8 percent.
Annuities Answer: c Diff: M
3. Suppose someone offered you the choice of two equally risky annuities, each paying
$10,000 per year for five years. One is an ordinary (or deferred) annuity, the other
is an annuity due. Which of the following statements is most correct?

a. The present value of the ordinary annuity must exceed the present value of the
annuity due, but the future value of an ordinary annuity may be less than the future value
of the annuity due.
b. The present value of the annuity due exceeds the present value of the ordinary
annuity, while the future value of the annuity due is less than the future value of the
ordinary annuity.
c. The present value of the annuity due exceeds the present value of the ordinary
annuity, and the future value of the annuity due also exceeds the future value of the
ordinary annuity.
d. If interest rates increase, the difference between the present value of the ordinary
annuity and the present value of the annuity due remains the same.
e. Statements a and d are correct.

Time value concepts Answer: e Diff: M


4. A $10,000 loan is to be amortized over 5 years, with annual end-of-year payments.
Given the following facts, which of these statements is most correct?

a. The annual payments would be larger if the interest rate were lower.
b. If the loan were amortized over 10 years rather than 5 years, and if the interest rate
were the same in either case, the first payment would include more dollars of interest
under the 5-year amortization plan.
c. The last payment would have a higher proportion of interest than the first payment.
d. The proportion of interest versus principal repayment would be the same for each
of the 5 payments.
e. The proportion of each payment that represents interest as opposed to repayment
of principal would be higher if the interest rate were higher.

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