Question:- 1) Which one of the following statements is true about an amortized l

ID: 2761992 • Letter: Q

Question

Question:- 1) Which one of the following statements is true about an amortized loan? A. With an amortized loan, a smaller proportion of each month’s payment goes toward interest in the early periods. B With an amortized loan, a bigger proportion of each month’s payment goes toward interest in the later periods. C. With an amortized loan, a bigger proportion of each month’s payment goes toward interest in the early periods. D With an amortized loan, the proportion of the loan that goes toward interest does not change at any point. Question:- 2) Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called: A. an annuity due. B. a growing perpetuity. C. an ordinary annuity. D. a growing annuity. Question 3) If your investment pays the same amount at the end of each year forever, the cash flow stream is called: A. an ordinary annuity. B. a perpetuity. C. an annuity due. D. none of the above. Question:- 4) Use the following table to calculate the expected return for the asset. Return Probability 0.10 0.30 0.20 0.50 0.25 0.25 A. 15.0% B. 17.5% C. 18.75% D. 19.25%

Explanation / Answer

Answer:

Correct Answer is C.

C. With an amortized loan, a bigger proportion of each month’s payment goes toward interest in the early periods.

Since the outstanding principal is higher is early days of loan therefore interest is higher in early period payment. As the principal reduces the interest is also reduces by the time.

Correct Answer is D. a growing annuity.

First of all we need to know what is annuity. Annuity is a series of receipts / payments of equal amount and for specified period.

In the question the time is specified 25 years and the annuity is increased (i.e. growing) by 15% every year. It is a growing annuity.

Correct Answer is B. a perpetuity.

Perpetuity is a series of payment or receipt of equal amount for infinite period. There is a difference of time between Annuity and Perpetuity. Annuity is for a specified period but in perpetuity period is not specified (i.e. it is for infinite period or perpetuity)

Correct Answer is D. 19.25%

Calculation of expected return

Return

Probability

Expected Return

(Return x Probability)

0.10

0.3

0.030

0.20

0.5

0.100

0.25

0.063

0.1925 or 19.25%