Interest Rates: Quiz
Why is the Federal Funds Rate so influential on other interest rates?
NOT c. The Federal Funds Rate is only important to heavy investors.
Jessica's bank is offering her a loan with a stated rate of 4.90% interest. If the interest is compounded every two months, what will Jessica really pay for interest?
NOT d. 4.96%
When calculating the effective rate of a loan, which statement or statements must be true if n is greater than 1? I. The length of the loan is greater than a single year. II. The effective rate will exceed the nominal rate. III. The interest will be compounded monthly.
a. II only
RJ has two loans. Loan H has a nominal rate of 5.68%, compounded daily. Loan I has a nominal rate of 6.33%, compounded monthly. Which loan's effective rate had the greater increase, relative to its nominal rate, and how much greater is its increase than that of the other loan?
a. Loan I's increase was 0.03 percentage points greater than Loan H's.
When dealing with a loan, who benefits from compounding interest more frequently, and why?
a. The lender benefits, because the interest compounded increases further interest calculations.
Craig is considering four loans. Loan L has a nominal rate of 8.254%, compounded daily. Loan M has a nominal rate of 8.474%, compounded weekly. Loan N has a nominal rate of 8.533%, compounded monthly. Loan O has a nominal rate of 8.604%, compounded yearly. Which of these loans will offer Craig the best effective interest rate?
a. loan L
Thomas has a loan with a nominal interest rate of 6.4624% and an effective interest rate of 6.4715%. Which of the following must be true? I. The loan has a duration greater than one year. II. The interest on Thomas's loan is compounded more than once yearly. III. The economy was strong when Thomas took out the loan.
b. II only
When calculating a loan's effective interest rate, if the nominal rate is 8.5%, what value of i do you plug into your equation?
c. 0.085
Melanie is looking for a loan. She is willing to pay no more than an effective rate of 9.955% annually. Which, if any, of the following loans meet Melanie's criteria? Loan A: 9.265% nominal rate, compounded weekly Loan B: 9.442% nominal rate, compounded monthly Loan C: 9.719% nominal rate, compounded quarterly
c. A and B
Why do interest rates on loans tend to be lower in a weak economy than in a strong one?
c. In a weak economy there is less demand for credit, so the price drops.
Say you are considering two loans. Loan F has a nominal interest rate of 5.66%, compounded monthly. Loan G has a rate of 6.02%, compounded semiannually. Which loan will give the lower effective interest rate, and how much lower will it be?
c. Loan F's effective rate will be 0.302 percentage points lower than Loan G's.
When calculating a loan's effective rate, if the interest compounds every two months, what value of n do you plug into your equation?
c. 6
Anna's bank gives her a loan with a stated interest rate of 10.22%. How much greater will Anna's effective interest rate be if the interest is compounded daily, rather than compounded monthly?
d. 0.0463 percentage points
What effect does inflation have on interest rates, and why?
d. Inflation increases interest rates, because lenders must charge more to gain a benefit on devalued money.