MULTIPLE-CHOICE QUESTIONS WITH ANSWERS RELATED TO ANNUITIES CAPITALISATION AND RATE OF CAPITALISATION
An annuity is best described as:
a) A one-time lump sum payment
b) A series of equal payments made at regular intervals
c) A variable payment made annually
d) A payment made only at the end of a specified period
Answer: b) A series of equal payments made at regular intervals
Capitalization is the process of:
a) Converting future cash flows into their present value
b) Converting present value into future cash flows
c) Converting future cash flows into their future value
d) Calculating the net worth of a company
Answer: a) Converting future cash flows into their present value
The rate at which future cash flows are converted into their present value is known as the:
a) Discount rate
b) Interest rate
c) Inflation rate
d) Nominal rate
Answer: a) Discount rate
If the discount rate increases, what happens to the present value of an annuity?
a) Increases
b) Decreases
c) Remains unchanged
d) Depends on the number of payments
Answer: b) Decreases
An annuity due differs from an ordinary annuity in that:
a) Payments are made at the beginning of each period for an annuity due
b) Payments are made at the end of each period for an annuity due
c) Annuity due payments are irregular
d) Annuity due has a higher present value
Answer: a) Payments are made at the beginning of each period for an annuity due
The formula for calculating the present value of an ordinary annuity is:
a) PV = Pmt / (1 + r)^n
b) PV = Pmt * ((1 – (1 + r)^-n) / r)
c) PV = Pmt * ((1 + r)^n – 1) / r
d) PV = Pmt * (1 – (1 + r)^-n) / r
Answer: c) PV = Pmt * ((1 + r)^n – 1) / r
When comparing two annuities with the same payment amount and number of periods, but different discount rates, the annuity with the:
a) Higher discount rate will have a higher present value
b) Lower discount rate will have a higher present value
c) Same discount rate will have a lower present value
d) Same discount rate will have a higher present value
Answer: b) Lower discount rate will have a higher present value
The process of finding the future value of an annuity is called:
a) Capitalization
b) Discounting
c) Amortization
d) Depreciation
Answer: a) Capitalization
Which of the following factors does not affect the present value of an annuity?
a) Number of periods
b) Payment amount
c) Discount rate
d) Frequency of payments
Answer: d) Frequency of payments
An annuity that pays Rs. 1000 at the end of each year for 5 years with a discount rate of 8% has a present value of approximately:
a) Rs. 3849
b) Rs. 3794
c) Rs. 3703
d) Rs. 3563
Answer: b) Rs. 3794
A perpetuity is a type of annuity where:
a) Payments continue indefinitely
b) Payments cease after a fixed number of periods
c) Payments vary each period
d) Payments are made irregularly
Answer: a) Payments continue indefinitely
The present value of a perpetuity can be calculated using the formula:
a) PV = Pmt / r
b) PV = Pmt * (1 – (1 + r)^-n) / r
c) PV = Pmt * ((1 + r)^n – 1) / r
d) PV = Pmt / (1 + r)^n
Answer: a) PV = Pmt / r
If the number of periods for an annuity increases while the payment amount and discount rate remain constant, what happens to the present value?
a) Increases
b) Decreases
c) Remains unchanged
d) Cannot be determined without additional information
Answer: a) Increases
An annuity that pays Rs. 500 at the end of each month for 10 years with a monthly interest rate of 0.5% has a present value closest to:
a) Rs. 47,379
b) Rs. 45,067
c) Rs. 42,812
d) Rs. 40,602
Answer: b) Rs. 45,067
In capital budgeting decisions, the process of determining the present value of future cash flows is essential for evaluating:
a) Short-term investments
b) Long-term investments
c) Fixed assets
d) Inventory management
Answer: b) Long-term investments
When comparing two annuities with the same payment amount and discount rate but different numbers of periods, the annuity with the:
a) Fewer periods will have a higher present value
b) Greater number of periods will have a higher present value
c) Fewer periods will have a lower present value
d) Same number of periods will have a higher present value
Answer: b) Greater number of periods will have a higher present value
An investor deposits Rs. 2000 into an account that pays an annual interest rate of 6%, compounded quarterly. What will be the balance in the account after 5 years?
a) Rs. 2,632.87
b) Rs. 2,835.93
c) Rs. 3,018.55
d) Rs. 3,231.04
Answer: d) Rs. 3,231.04
An annuity that pays Rs. 800 at the beginning of each year for 8 years with an annual discount rate of 10% has a present value closest to:
a) Rs. 4,624
b) Rs. 4,880
c) Rs. 5,320
d) Rs. 5,800
Answer: c) Rs. 5,320
The future value of an annuity can be calculated using the formula:
a) FV = Pmt / r
b) FV = Pmt * ((1 + r)^n – 1) / r
c) FV = Pmt / (1 + r)^n
d) FV = Pmt * (1 – (1 + r)^-n) / r
Answer: b) FV = Pmt * ((1 + r)^n – 1) / r
When the interest rate used for discounting future cash flows increases, what happens to the present value of an annuity?
a) Increases
b) Decreases
c) Remains unchanged
d) Depends on the number of periods
Answer: b) Decreases
An annuity that pays Rs. 1200 at the end of each quarter for 5 years with a quarterly interest rate of 2% has a present value closest to:
a) Rs. 21,680
b) Rs. 22,200
c) Rs. 22,960
d) Rs. 23,400
Answer: b) Rs. 22,200
In finance, the process of discounting future cash flows involves:
a) Increasing the value of future cash flows
b) Decreasing the value of future cash flows
c) Keeping the value of future cash flows constant
d) Ignoring the value of future cash flows
Answer: b) Decreasing the value of future cash flows
An annuity that pays Rs. 1500 at the end of each month for 3 years with a monthly interest rate of 0.8% has a present value closest to:
a) Rs. 49,912
b) Rs. 50,700
c) Rs. 51,480
d) Rs. 52,260
Answer: b) Rs. 50,700
The process of calculating the present value of future cash flows is essential in determining the:
a) Historical performance of a company
b) Future growth potential of a company
c) Liquidity of a company
d) Solvency of a company
Answer: b) Future growth potential of a company
An annuity that pays Rs. 100 at the beginning of each month for 5 years with a monthly interest rate of 1% has a present value closest to:
a) Rs. 5,476
b) Rs. 5,600
c) Rs. 5,750
d) Rs. 5,900
Answer: a) Rs. 5,476
An annuity that pays Rs. 800 at the end of each year for 7 years with an annual discount rate of 12% has a present value closest to:
a) Rs. 3,747
b) Rs. 4,100
c) Rs. 4,525
d) Rs. 5,000
Answer: c) Rs. 4,525
The process of converting future cash flows into their present value is known as:
a) Capitalization
b) Amortization
c) Depreciation
d) Discounting
Answer: d) Discounting
Which of the following statements about annuities is true?
a) An annuity due pays at the beginning of each period.
b) Annuities have an infinite number of payments.
c) The present value of an annuity increases with a higher discount rate.
d) An ordinary annuity pays at the end of each period.
Answer: d) An ordinary annuity pays at the end of each period.
An annuity that pays Rs. 500 at the beginning of each year for 10 years with an annual interest rate of 8% has a present value closest to:
a) Rs. 3,590
b) Rs. 4,091
c) Rs. 4,605
d) Rs. 5,132
Answer: c) Rs. 4,605
The future value of an annuity due can be calculated using the formula:
a) FV = Pmt / r
b) FV = Pmt * ((1 + r)^n – 1) / r
c) FV = Pmt / (1 + r)^n
d) FV = Pmt * (1 – (1 + r)^-n) / r
Answer: b) FV = Pmt * ((1 + r)^n – 1) / r
An annuity that pays Rs. 200 at the end of each month for 5 years with a monthly interest rate of 0.6% has a present value closest to:
a) Rs. 11,089
b) Rs. 11,487
c) Rs. 11,895
d) Rs. 12,304
Answer: a) Rs. 11,089
Which of the following is NOT a characteristic of a perpetuity?
a) It has a finite number of payments.
b) Payments continue indefinitely.
c) The present value can be calculated using a simple formula.
d) It is a type of annuity.
Answer: a) It has a finite number of payments.
An annuity that pays Rs. 1000 at the end of each quarter for 8 years with a quarterly interest rate of 3% has a present value closest to:
a) Rs. 21,321
b) Rs. 22,445
c) Rs. 23,570
d) Rs. 24,695
Answer: b) Rs. 22,445
The process of determining the present value of a future cash flow involves:
a) Increasing the value of future cash flows.
b) Decreasing the value of future cash flows.
c) Keeping the value of future cash flows constant.
d) Ignoring the value of future cash flows.
Answer: b) Decreasing the value of future cash flows.
An annuity that pays Rs. 1500 at the end of each month for 4 years with a monthly interest rate of 1.2% has a present value closest to:
a) Rs. 56,000
b) Rs. 58,200
c) Rs. 60,480
d) Rs. 62,832
Answer: c) Rs. 60,480
When comparing two annuities with the same payment amount and number of periods, but different discount rates, the annuity with the:
a) Higher discount rate will have a lower present value.
b) Lower discount rate will have a lower present value.
c) Higher discount rate will have a higher present value.
d) Lower discount rate will have a higher present value.
Answer: d) Lower discount rate will have a higher present value.
An annuity that pays Rs. 1200 at the beginning of each year for 6 years with an annual discount rate of 9% has a present value closest to:
a) Rs. 5,220
b) Rs. 5,640
c) Rs. 6,080
d) Rs. 6,550
Answer: b) Rs. 5,640
The future value of an annuity can be calculated by:
a) Discounting the future cash flows.
b) Adding up the future cash flows.
c) Multiplying the present value by the interest rate.
d) Using the annuity due formula.
Answer: b) Adding up the future cash flows.
An annuity that pays Rs. 800 at the end of each quarter for 6 years with a quarterly interest rate of 2% has a present value closest to:
a) Rs. 22,525
b) Rs. 23,200
c) Rs. 23,950
d) Rs. 24,675
Answer: c) Rs. 23,950
The process of determining the present value of future cash flows involves:
a) Increasing the value of future cash flows.
b) Decreasing the value of future cash flows.
c) Keeping the value of future cash flows constant.
d) Ignoring the value of future cash flows.
Answer: b) Decreasing the value of future cash flows.
An annuity that pays Rs. 1000 at the beginning of each month for 5 years with a monthly interest rate of 1.5% has a present value closest to:
a) Rs. 52,652
b) Rs. 53,840
c) Rs. 55,075
d) Rs. 56,360
Answer: b) Rs. 53,840
Which of the following factors affects the present value of an annuity?
a) Number of periods
b) Payment amount
c) Discount rate
d) All of the above
Answer: d) All of the above
An annuity that pays Rs. 1500 at the end of each quarter for 7 years with a quarterly interest rate of 3% has a present value closest to:
a) Rs. 43,500
b) Rs. 44,750
c) Rs. 46,025
d) Rs. 47,320
Answer: c) Rs. 46,025
The present value of an annuity due is:
a) The value of the annuity at the beginning of the first period.
b) The value of the annuity at the end of the last period.
c) The sum of all future cash flows.
d) The future value of the annuity discounted to the present.
Answer: a) The value of the annuity at the beginning of the first period.
An annuity that pays Rs. 500 at the beginning of each month for 4 years with a monthly interest rate of 0.8% has a present value closest to:
a) Rs. 21,920
b) Rs. 22,450
c) Rs. 22,980
d) Rs. 23,510
Answer: b) Rs. 22,450
The present value of an annuity due is generally ________ the present value of an ordinary annuity.
a) Less than
b) Greater than
c) Equal to
d) Unrelated to
Answer: b) Greater than
An annuity that pays Rs. 200 at the beginning of each quarter for 5 years with a quarterly interest rate of 1.5% has a present value closest to:
a) Rs. 8,980
b) Rs. 9,260
c) Rs. 9,540
d) Rs. 9,820
Answer: b) Rs. 9,260
The future value of an annuity due can be calculated using the formula:
a) FV = Pmt / r
b) FV = Pmt * ((1 + r)^n – 1) / r
c) FV = Pmt / (1 + r)^n
d) FV = Pmt * (1 – (1 + r)^-n) / r
Answer: b) FV = Pmt * ((1 + r)^n – 1) / r
An annuity that pays Rs. 1000 at the end of each year for 6 years with an annual discount rate of 7% has a present value closest to:
a) Rs. 4,500
b) Rs. 4,750
c) Rs. 5,000
d) Rs. 5,250
Answer: b) Rs. 4,750
When comparing two annuities with the same payment amount and discount rate but different numbers of periods, the annuity with the:
a) Fewer periods will have a lower present value.
b) Greater number of periods will have a lower present value.
c) Fewer periods will have a higher present value.
d) Greater number of periods will have a higher present value.
Answer: d) Greater number of periods will have a higher present value.
