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FRM Part 1 Annuities — practice questions

Explore 30 free Annuities questions in FRM Part 1 Finance. Open each question or exercise to read its content, reference answers and available explanation.

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Annuities questions and exercises with answers

Showing questions 1–30 of 30.

An analyst moves a future cash flow backwards along a timeline to state it in today's money. That step is called:Read the answer and worked solution →A share pays a fixed dividend forever. Because that perpetuity never ends, you cannot compute its:Read the answer and worked solution →A preferred share pays 8 a year and investors require 10 percent. Its value today is 8 divided by:Read the answer and worked solution →The rate used to value that share is not the rate printed on the stock but the:Read the answer and worked solution →A fund pays 5,000 at the end of every year for ten years. A fixed periodic stream like that is called an:Read the answer and worked solution →The first of those ten payments arrives one year from now, so the stream is an:Read the answer and worked solution →A lottery hands over the first cheque today rather than in a year. That stream is an:Read the answer and worked solution →The only difference between an ordinary annuity and an annuity due is:Read the answer and worked solution →Compared with an otherwise identical ordinary annuity, the value of an annuity due is always:Read the answer and worked solution →To turn an ordinary annuity answer into an annuity due answer, multiply the result by:Read the answer and worked solution →For five payments of 25,000 at 8 percent, the annuity due value exceeds the ordinary annuity value by:Read the answer and worked solution →For monthly payments you divide the annual rate by the periods in a year, and you multiply the:Read the answer and worked solution →A three-year car loan at 6 percent paid monthly uses a rate of 0.5 percent and periods numbering:Read the answer and worked solution →Monthly debt service on a home loan is handled by setting the periods per year at:Read the answer and worked solution →A schedule showing how and when a debt will be repaid with interest is called loan:Read the answer and worked solution →Every fixed monthly payment on a car loan contains some interest and also some:Read the answer and worked solution →As a fixed-payment loan runs on, the interest portion inside each payment:Read the answer and worked solution →A rate that reflects compounding happening within a single year is the:Read the answer and worked solution →Stated and effective interest rates are equal only when interest compounds:Read the answer and worked solution →A card charging 1.5 percent a month gives an effective annual rate of:Read the answer and worked solution →A 1,000 purchase left unpaid for one month at 1.5 percent is billed interest of:Read the answer and worked solution →Repayment of a student loan does not begin until the borrower's education is:Read the answer and worked solution →Catch the annuity wordsRead the answer and worked solution →Pop the loan termsRead the answer and worked solution →Run the timing gatesRead the answer and worked solution →Slice the time wordsRead the answer and worked solution →Ordinary or dueRead the answer and worked solution →Sort the finance wordsRead the answer and worked solution →Type the numberRead the answer and worked solution →Time value bingoRead the answer and worked solution →

Worked practice questions

An analyst moves a future cash flow backwards along a timeline to state it in today's money. That step is called:

  1. Discounting
  2. Compounding
  3. Converting
  4. Correcting
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Correct answer: A. Discounting

1. Moving forward on a timeline builds value up and is compounding. 2. Moving backward strips the growth back out again. 3. That backward step is discounting. _Source: OpenStax Principles of Finance 2e, Chapter 8, Time Value of Money II._

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A share pays a fixed dividend forever. Because that perpetuity never ends, you cannot compute its:

  1. Dividend rate
  2. Future value
  3. Present value
  4. Payment size
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Correct answer: B. Future value

1. A future value needs a fixed end point to compound towards. 2. A perpetuity has no end point at all. 3. So its future value cannot be determined, though its present value can. _Source: OpenStax Principles of Finance 2e, Chapter 8, Time Value of Money II._

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A preferred share pays 8 a year and investors require 10 percent. Its value today is 8 divided by:

  1. 0.10
  2. 0.08
  3. 1.10
  4. 8.00
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Correct answer: A. 0.10

1. The price is the annual dividend divided by the rate of return. 2. The dividend is 8 and the required return is 0.10. 3. So the value is 8 divided by 0.10, which is 80. _Source: OpenStax Principles of Finance 2e, Chapter 8, Time Value of Money II._

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FinanceTime Value of Money