Interest Rates (Practice)
Why do interest rates on loans tend to be higher in a strong economy than in a weak one?
a. Credit markets increase in a strong economy, and with increased demand come increased prices.
Orlando has a loan with an effective interest rate of 7.918%, compounded annually. Which of the following must be true? I. In the effective rate formula, n is equal to one. II. The nominal rate is 7.918%. III. The Federal Funds Rate is static.
a. I and II
When calculating the effective rate of a loan, which statement or statements must be true if n is equal to 1? I. The nominal rate equals the effective rate. II. The length of the loan is exactly one year. III. The interest is compounded annually.
a. I and III
The nominal rate on Sarah's loan is 7.250%. If the interest is compounded monthly, what rate of interest is Sarah actually paying?
b. 7.496%
Mike is looking for a loan. He is willing to pay no more than an effective rate of 8.000% annually. Which, if any, of the following loans meet Mike's criteria? Loan X: 7.815% nominal rate, compounded semiannually Loan Y: 7.724% nominal rate, compounded monthly Loan Z: 7.698% nominal rate, compounded weekly
b. X and Z
Tiffany has taken out a loan with a stated interest rate of 8.145%. How much greater will Tiffany's effective interest rate be if the interest is compounded weekly than if it is compounded semiannually?
c. 0.1681 percentage points
Wyatt is paying back a loan with a nominal interest rate of 13.62%. If the interest is compounded quarterly, how much greater is Wyatt's effective interest rate than his nominal interest rate?
d. 0.71 percentage points
Which factor or factors listed below are external influences on a loan's interest rate? I. the borrower's credit history II. the length of the loan III. the federal funds rate
d. III only
Dave is considering two loans. Loan U has a nominal interest rate of 9.97%, and Loan V has a nominal interest rate of 10.16%. If Loan U is compounded daily and Loan V is compounded quarterly, which loan will have the lower effective interest rate, and how much lower will it be?
d. Loan U's effective rate will be 0.0713 percentage points lower than Loan V's.
Andrew is choosing between four loans. Loan P has a nominal rate of 10.393%, compounded daily. Loan Q has a nominal rate of 10.516%, compounded weekly. Loan R has a nominal rate of 10.676%, compounded monthly. Loan S has a nominal rate of 10.755%, compounded annually. Which loan will give Andrew the best effective interest rate?
d. loan S
