FINAN 815 CH 5b SmartBook

True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.

F

True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect__rate, npery).

F

True or false: With interest-only loans, the principal is never repaid.

F

Select all that apply In the Excel setup of a loan amortization problem, which of the following occurs? 1. To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. 2. To find the dollar interest each month, you multiply the balance times the yearly interest rate. 3. The payment is found with = PMT(rate, nper, -pv, fv). 4. To find the new balance, you subtract the dollar interest from the old balance.

1. To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. 3. The payment is found with = PMT(rate, nper, -pv, fv).

Fill in the Blank Question The interest rate charged per period multiplied by the number of periods per year is equal to ______ _____ _____on a loan.

Annual Percentage Rate

True or false: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.

T

True or false: Interest rates can be quoted in various ways.

T

Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12 percent compounded quarterly to an EAR?

EFFECT(0.12,4)

True or false: The annual percentage rate (APR) is calculated as the interest rate charged per period on a loan divided by the number of periods per year.

F

The most common way to repay a loan is to pay ______.

a single fixed payment every period

One step in calculating an EAR is to ______the quoted rate by the number of times that the interest is compounded.

divide

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

The _______ annual rate is the interest rate expressed as if it were compounded once per year.

effective

A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with ________-term business loans.

medium

Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the ________ value.

nper

The entire principal of an interest-only loan is the:

original loan amount.

Amortization is the process of paying off loans by regularly reducing the ______.

principal

If you borrow $15,000 today at 5 percent annual interest to be repaid in one year as a lump sum, this is termed a ______.

pure discount loan

Compounding during the year can lead to a difference between the ________rate and the effective rate. (Enter only one word per blank.)

quoted

Which of the following is the simplest form of loan? Multiple choice question. a partially amortized loan an interest-only loan a pure discount loan an amortized loan

a pure discount loan

More frequent compounding leads to ______.

higher EARs

Fill in the Blank Question The interest rate charged per period multiplied by the number of periods per year is equal to ________ _______ on a loan.

annual percentage rate

The original amount of a loan is termed the loan ______.

principal

EAR = (1 + _____rate/m)m − 1

quoted

Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?

(1 + quoted rate/m)m − 1

Select all that apply Which of the following are ways to amortize a loan? Pay the principal and interest every period in a fixed payment. Pay both interest and principal in one lump sum at maturity. Pay only the interest every period and pay the principal off at maturity. Pay the interest each period plus some fixed amount of the principal.

Pay the principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal.

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.

compounding

Which of the following is not a way to amortize a loan? fixed payments fixed interest payments only interest plus fixed amount

fixed interest payments only

With typical interest-only loans, the entire principal is:

repaid at some point in the future.

The general formula for ______ is (1 + quoted rate/m)m − 1.

the EAR

Because of ______ and ______, interest rates are often quoted in many different ways.

tradition; legislation