Chapter 7 Interest Rates and Bond Valuation - 9056 Words

CHAPTER 6 Discounted Cash Flow Valuation I. DEFINITIONS ANNUITY a 1. 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 ANNUITIES b 2. The present value factor for annuities is calculated as: a. (1 + present value factor) ï‚ ¸ r. b. (1 – present value factor) ï‚ ¸ r. c. present value factor + (1 ï‚ ¸ r). d. (present value factor ï‚ ´ r) + (1 ï‚ ¸ r).†¦show more content†¦UNEVEN CASH FLOWS AND PRESENT VALUE b 14. 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 five annual 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. UNEVEN CASH FLOWS AND FUTURE VALUE a 15. You are considering two projects with the following cash flows: Project A Project B Year 1 $2,500 $4,000 Year 2 3,000 3,500 Year 3 3,500 3,000 Year 4 4,000 2,500 Which of the following statements are true concerning these two projects? I. 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