1. EAR. What is the effective annual rate of a mortgage rate that is advertised

Question

1. EAR. What is the effective annual rate of a mortgage rate that is advertised at 7.75% (APR) over the next twenty years and paid with monthly payments?

2. Present Value with Periodic Rates. Let’s follow up with Sam Hinds, the dentist from Chapter 4, and his remodeling project (Problem 12). The cost of the equipment for the project is $18,000, and the purchase will be financed with a 7.5% loan over six years. Originally, the loan called for annual payments. Redo the payments based on quarterly payments (four per year) and monthly payments (twelve per year). Compare the annual cash outflow of the two payments. Why does the monthly payment plan have less total cash outflow each year?

3. Inflation, Nominal Interest Rates and Real Rates. Given the following information, estimate the inflation rate with the approximate nominal interest rate equation and the true nominal interest rate equation.

Nominal Rate

Real Rate

Approximate Inflation

True Inflation

11%

5%

8%

2%

21%

14%

5.5%

1.25%

4. Interest Premium. Shaky Company has just issued a five-year bond with a yield of 9% while Stable Company has issued an identical five-year bond but with a yield of 7%. Why did the market demand a higher return from Shaky?

Nominal Rate

Real Rate

Approximate Inflation

True Inflation

11%

5%

8%

2%

21%

14%

5.5%

1.25%

Explanation / Answer

1.

EAR=(1+(7.75%/12))^12-1

=8.03%

WE DO ONLY FIRST QUESTION AS PER CHEGG.

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