Your are interested in investing your money in a bank account. Which of the following banks provides your with the highest effective rate of interest?
a. Bank 1 pays 8 % with monthly compounding.
b. Bank 2 pays 8% with annual compounding.
c. Bank 3 pays 8
Statement d is correct; the other statements are false. Looking at responses a through d, you should realize the choice with the greatest frequency of compounding will give you the highest EAR. This is statement d. Now, compare choices d and e. We know EA
Your family recently obtained a 30-year (360-month) $100,000 fixed-rate mortgage. Which of the following statements is most correct? (ignore all taxes and transaction costs.)
a. The remaining balance after three years will be $100,000 less the total amoun
Statement b is true; the others are false. The remaining balance after three years will be $100,000 less the total amount of repaid principal during the first 36 months. On a fixed-rate mortgage the monthly payment remains the same.
Which of the following statements is most correct?
a. An investment that compounds interest semiannually, and has a nominal rate of 10 percent, will have an effective rate less than 10 percent.
b. The present value of a 3-year $100 annuity due is less tha
Statement c is correct; the other statements are false. The effective rate of the investment in statement a is 10.25%. The present value of the annuity due is greater than the present value of the ordinary annuity.
Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five years. One is an ordinary (or deferred) annuity, the other is an annuity due. Which of the following statements is most correct?
a. The present va
By definition, an annuity due is received at the beginning of the year while an ordinary annuity is received at the end of the year. Because the payments are received earlier, both the present and future values of the annuity due are greater than those of
If the interest rate ________, the future value of an investment ________.
increases, increases
Which of the following statements regarding present value and future value interest factors is true?
a. For a given interest rate and time period the future value factor is less than the present value factor.
b. For comparable time periods and interest ra
b. For comparable time periods and interest rates, future value factors are the inverse of present value factors.
If you are promised a series of equal monthly payments beginning one month from today or a single payment today for the series of future payments, how would you evaluate the two options?
a. Compare the single payment to the series of future payments disco
Compare the single payment to the series of future payments discounted using a present value annuity.
The interest paid on the interest earned, but not withdrawn during an earlier period is called:
compound interest.
As the interest rate ________, the future value of an investment ________
a. compounds at a faster rate, increases
b. decreases, increases
c. increases, decreases
d. decreases, may increase or decrease
a. compounds at a faster rate, increases
A $500.00 purchase can be paid off interest free one year from now or have a $50.00 coupon applied to the purchase immediately. Assuming you earn an 8% annual rate of interest, which option is best for you and why?
a. The immediate purchase because paying
The immediate purchase option, because the payment made one year from now is equivalent to paying $462.96 today.
Is this statement true or false? If an ordinary annuity calls for 10 annual payments of $1,000 each, then a corresponding annuity due would also have 10 payments of $1,000, but each of the annuity due's payments would occur one year earlier than for the o
TRUE
Is this statement true or false? A rational person should choose to receive cash flows from an annuity due of $1,000 per year rather than from a similar ordinary annuity.
TRUE
Is this statement true or false? Assuming an interest rate greater than zero, an annuity due should always have a higher future value than an ordinary annuity.
TRUE