Ch6

On the day you entered college, you borrowed $18,000 on an interest-only, four-year loan at 5.25 percent from your local bank. Payments are to be paid annually. What is the amount of your loan payment in year 2? A. $945 B. $1,890 C. $3,600 D. $5,106 E. $6,250

A. $945 Payment in year 2 = $18,000 × 0.0525 = $945

What is the annual percentage rate on a loan with a stated rate of 2.25 percent per quarter? A. 9.00 percent B. 9.09 percent C. 9.18 percent D. 9.27 percent E. 9.31 percent

A. 9.00 percent APR = 0.0225 × 4 = 9.00 percent

Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal? A. amortized loan B. modified loan C. balloon loan D. pure discount loan E. interest-only loan

A. amortized loan

The interest rate that is quoted by a lender is referred to as which one of the following? A. stated interest rate B. compound rate C. effective annual rate D. simple rate E. common rate

A. stated interest rate

Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account? A. 18.95 percent B. 19.80 percent C. 20.90 percent D. 21.25 percent E. 21.70 percent

B. 19.80 percent APR = 0.0165 × 12 = 19.80 percent

Which one of the following statements related to annuities and perpetuities is correct? A. An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually. B. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly. C. Most loans are a form of a perpetuity. D. The present value of a perpetuity cannot be computed, but the future value can. E. Perpetuities are finite but annuities are not.

B. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.

24. You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis. A. interest-only loan B. amortized loan with equal principal payments C. amortized loan with equal loan payments D. discount loan E. balloon loan where 50 percent of the principal is repaid as a balloon payment

B. amortized loan with equal principal payments

What is the interest rate charged per period multiplied by the number of periods per year called? A. effective annual rate B. annual percentage rate C. periodic interest rate D. compound interest rate E. daily interest rate

B. annual percentage rate

An amortized loan: A. requires the principal amount to be repaid in even increments over the life of the loan. B. may have equal or increasing amounts applied to the principal from each loan payment. C. requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. D. requires that all payments be equal in amount and include both principal and interest. E. repays both the principal and the interest in one lump sum at the end of the loan term.

B. may have equal or increasing amounts applied to the principal from each loan payment.

On the day you entered college you borrowed $25,000 from your local bank. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much total interest will you pay on this loan? A. $5,266.67 B. $5,400.00 C. $5,937.50 D. $6,529.00 E. $6,607.11

C. $5,937.50 Total interest paid = $25,000 × 0.0475 × 5 = $5,937.50

Which of the following statements related to interest rates are correct? I. Annual interest rates consider the effect of interest earned on reinvested interest payments. II. When comparing loans, you should compare the effective annual rates. III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. IV. Annual and effective interest rates are equal when interest is compounded annually. A. I and II only B. II and III only C. II and IV only D. I, II, and III only E. II, III, and IV only

C. II and IV only

You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? A. Both options are of equal value given that they both provide $12,000 of income. B. Option A has the higher future value at the end of year three. C. Option B has a higher present value at time zero than does option A. D. Option B is a perpetuity. E. Option A is an annuity.

C. Option B has a higher present value at time zero than does option A.

Which one of the following statements concerning interest rates is correct? A. Savers would prefer annual compounding over monthly compounding. B. The effective annual rate decreases as the number of compounding periods per year increases. C. The effective annual rate equals the annual percentage rate when interest is compounded annually. D. Borrowers would prefer monthly compounding over annual compounding. E. For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

C. The effective annual rate equals the annual percentage rate when interest is compounded annually.

How is the principal amount of an interest-only loan repaid? A. The principal is forgiven over the loan period so does not have to be repaid. B. The principal is repaid in equal increments and included in each loan payment. C. The principal is repaid in a lump sum at the end of the loan period. D. The principal is repaid in equal annual payments. E. The principal is repaid in increasing increments through regular monthly payments.

C. The principal is repaid in a lump sum at the end of the loan period.

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum? A. amortized loan B. continuing loan C. balloon loan D. remainder loan E. interest-only loan

C. balloon loan

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates? A. stated rate B. discounted annual rate C. effective annual rate D. periodic monthly rate E. consolidated monthly rate

C. effective annual rate

An ordinary annuity is best defined by which one of the following? A. increasing payments paid for a definitive period of time B. increasing payments paid forever C. equal payments paid at regular intervals over a stated time period D. equal payments paid at regular intervals of time on an ongoing basis E. unequal payments that occur at set intervals for a limited period of time

C. equal payments paid at regular intervals over a stated time period

87. The preferred stock of Casco has a 5.48 percent dividend yield. The stock is currently priced at $59.30 per share. What is the amount of the annual dividend? A. $2.80 B. $2.95 C. $3.10 D. $3.25 E. $3.40

D. $3.25 C = $59.30 × 0.0548 = $3.25

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. amortized B. continuous C. balloon D. pure discount E. interest-only

D. pure discount

The entire repayment of which one of the following loans is computed simply by computing a single future value? A. interest-only loan B. balloon loan C. amortized loan D. pure discount loan E. bullet loan

D. pure discount loan

Which one of the following accurately defines a perpetuity? A. a limited number of equal payments paid in even time increments B. payments of equal amounts that are paid irregularly but indefinitely C. varying amounts that are paid at even intervals forever D. unending equal payments paid at equal time intervals E. unending equal payments paid at either equal or unequal time intervals

D. unending equal payments paid at equal time intervals

John's Auto Repair just took out an $89,000, 10-year, 8 percent, interest-only loan from the bank. Payments are made annually. What is the amount of the loan payment in year 10? A. $7,120 B. $8,850 C. $13,264 D. $89,000 E. $96,120

E. $96,120 Payment in year 10 = $89,000 + ($89,000 × 0.08) = $96,120

You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities? A. These two annuities have equal present values but unequal futures values at the end of year five. B. These two annuities have equal present values as of today and equal future values at the end of year five. C. Annuity B is an annuity due. D. Annuity A has a smaller future value than annuity B. E. Annuity B has a smaller present value than annuity A.

E. Annuity B has a smaller present value than annuity A.

Which one of these statements related to growing annuities and perpetuities is correct? A. The cash flow used in the growing annuity formula is the initial cash flow at time zero. B. Growth rates cannot be applied to perpetuities if you wish to compute the present value. C. The future value of an annuity will decrease if the growth rate is increased. D. An increase in the rate of growth will decrease the present value of an annuity. E. The present value of a growing perpetuity will decrease if the discount rate is increased.

E. The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of the following statements correctly states a relationship? A. Time and future values are inversely related, all else held constant. B. Interest rates and time are positively related, all else held constant. C. An increase in the discount rate increases the present value, given positive rates. D. An increase in time increases the future value given a zero rate of interest. E. Time and present value are inversely related, all else held constant.

E. Time and present value are inversely related, all else held constant.

Which one of the following terms is used to identify a British perpetuity? A. ordinary annuity B. amortized cash flow C. annuity due D. discounted loan E. consol

E. consol

Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate? A. annual B. semi-annual C. monthly D. daily E. continuous

E. continuous

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. amortized loan B. modified loan C. balloon loan D. pure discount loan E. interest-only loan

E. interest-only loan