Question 6 Which of the following statements is CORRECT, assuming positive inter

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Question 6

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
Answer The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
.2 points
Question 7

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?
Answer Bank 1; 6.1% with annual compounding.
Bank 2; 6.0% with monthly compounding.
Bank 3; 6.0% with annual compounding.
Bank 4; 6.0% with quarterly compounding.
Bank 5; 6.0% with daily (365-day) compounding.

.2 points
Question 8

Which of the following statements is CORRECT?
Answer The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
.2 points
Question 9

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.
Answer Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
Investment D pays $2,500 at the end of 10 years (just one payment).
Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).
.2 points
Question 10

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?
Answer The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
The discount rate decreases.
The riskiness of the investment

Explanation / Answer

A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.

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