Quiz 2: Financial Management (Ch 5) – Flashcards

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts. A. True B. False

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. A. True B. False

The present value decreases as either the discount rate or the number of periods per year decreases, other things held constant. A. True B. False

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan). A. True B. False

Which of the following bank accounts has the highest effective annual return? A. An account that pays 7% nominal interest with monthly compounding. B. An account that pays 8% nominal interest with daily (365-day) compounding. C. An account that pays 8% nominal interest with monthly compounding. D. An account that pays 8% nominal interest with annual compounding. E. An account that pays 7% nominal interest with daily (365-day) compounding.