FINANCE 5

(T/F) When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.

False

Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pay interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four years' time?

$220

Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)?

$392,957

A 10% APR with quarterly compounding is equivalent to an EAR of...

10.38%

The effective annual rate (EAR) for a loan with a stated APR of 11% compounded quarterly is closest to...

11.46%

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firm's borrowings is closest to...

9.31%

(T/F) The annual percentage rate indicates the amount of interest, including the effect of any compounding.

False

Which of the following is/are true?

One II is true (The APR can never exceed the EAR)

What is the general relationship between the absolute value of APR and EAR for an investment?

The APR of a project will either equal its EAR or be smaller than EAR. The APR will equal EAR with annual compounding. For all other compounding intervals, the APR will be smaller than EAR.

Which of the following statements is false about interest rates?

The annual percentage rate indicates the amount of interest including the effect of compounding.

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

The loan will be for a long period of time.

Which of the following best describes the annual percentage rate?

The quoted interest rate which, considered with the compounding period, gives the effective interest rate.

Which of the following accounts has the highest EAR?

one that pays 1.0% per month

A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?

semiannual compounding

(T/F) When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.

True

Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?

Yes, additional care needs to be taken in both. For cash flows that have an interval longer than a year, one should be careful to show the years with zero cash flows. Alternately, for those with shorter than a year, one should be careful about modifying the interest rate to match the time interval.

When computing a present value, which of the following is true?

You should adjust the discount rate to match the interval between cash flows

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to...

0.6623%

A 12% APR with bi-monthly compounding is equivalent to an EAR of...

12.62%

A 12% APR with monthly compounding is closest to an EAR of...

12.68%

The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to...

5.13%

(Chart) The highest effective rate of return you could earn on any of these investments is closest to...

6.1610%

A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually?

6.30%

(Chart) The lowest effective rate or return you could earn on any of these investments is closest to...

6.3830%

A bank offers a loan that will require you to pay 7% interest compounded monthly. Which of the following is the closest to the EAR charged by the bank?

7.23%

The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to...

8.30%

Everything else remaining same, under what situation will APR and EAR be equal?

An APR will equal EAR only with annual compounding assuming everything else remains same.

What care, if any, should be taken when cash flows occur in periodicities that are shorter than a year (quarterly, monthly)?

Interest rates have to be modified to correspond to the cash flow interval, so match the compounding period equal to cash flow intervals.

The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR?

Investment A: 6.0% compounded yearly

(Chart) Which alternative offers you the lowest effective rate of return?

Investment A: 6.9030% compounded annually

(Chart) Which alternative offers you the highest effective rate of return?

Investment D: 6.1204% compounded monthly

What is the effective annual rate (EAR)?

It is the interest rate that would earn the same interest with annual compounding.

An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease form the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright?

Leasing costs $145 more than buying