Business Finance: Quiz 5
A theoretical interest rate at which an investor is guaranteed to earn the subscribed rate and the borrower will never default.
Risk-free Rate
An annual percentage rate must be converted to the appropriate periodic rate when compounding is more frequent than once a year.
TRUE
Most consumer loan payments are monthly.
TRUE
The EAR is 5.85% if the APR is 5.85% and compounding is annual.
TRUE
The sum of two major components, the real interest rate and expected inflation.
Nominal Interest Rates
Assume that Don is 45 years old and has 20 years for saving until he retires. He expects an APR of 8.5% on his investments. How much does he need to save if he puts money away annually in equal end-of-the-year amounts to achieve a future value of one million dollars in 20 years time?
$20,670.97
The periodic interest rate of r is equal to
APR / (C/Y)
Assume that you are willing to postpone the consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year you will be able to...
Buy more goods or services
Typically the most frequent number of compounding periods an institution will use when paying interest.
Daily Compounding
If we want to get some idea about a default premium over time, between two specific assets, we can compare the returns on short-term or medium-term bonds with those on large company stocks.
FALSE
Inflation does not vary over time.
FALSE
No part of the default premium has to do with the frequency of the default by the borrower.
FALSE
The EAR is about 6.09% if the APR is 6.01% and compounding is monthly.
FALSE
The borrowing rate for real estate is more than the borrowing rates for autos, boats and VISA Reward Credit Cards.
FALSE
We can get an accurate estimate of the default premium over the last fifty years between large company stocks in the US and long term government bonds if we assume the investment horizon is ten years for both investments.
FALSE
When interest rates are stated or given for loan repayments, it is not assumed that they are the annual percentage rates (APRs) unless specifically stated otherwise.
FALSE
When you visit any financial institution you will see only one advertised rates.
FALSE
The relationship between the nominal rate, the real rate, and inflation.
Fisher Effect
If you take out a loan from a bank, you will be charged ________ .
For both principal and interest.
APRs must be converted to the appropriate periodic rates when compounding is ________ .
More frequent than once a year.
Nominal interest rates are the sum of two major components. These components are ________.
The real interest rate and expected inflation.
The number of periods for a consumer loan (n) is equal to the...
number of years x the compounding periods per year
