Quiz 3

Your mortgage has 20 years left, and has an APR of 6% with monthly compounding and monthly payments of $1500. What is the outstanding balance?

$209,371.16 *************************************

Suppose you can get a 24-month, 6% APR loan (monthly compounding) to buy the just released iphone 11 Pro Max, which is priced at $1,099 (suppose you do not have sales tax in your state). What will your monthly payment be?

$48.71 *******************************

Given an Effective Annual Rate (EAR) of 12%, the equivalent interest rate for one-month is ____%.

0.95% (1+12%)^(1/12) -1 = 0.0094888 estimated to 0.95.

What factors affect interest rates? I. Expected inflation II. Investment horizon or term III. Risk IV. Monetary Policy

I, II, III, IV

Given an Annual Percentage Rate (APR) of 12% with quarterly compounding, the equivalent interest rate for one-month is ____%.

0.99 ** .12 / 4 times (quarterly)=== .03 (QUARTERLY APR rate) **Convert to equivalent ANNUAL rate: (1 + .03)^4=== 1.1255 (growing 1 year is same as growing 4 quarters) **Convert to equivalent MONTHLY rate: (1.1255)^1/12 -1 (using Equiv. n-period discount rate) ======= 0.99

Given an Annual Percentage Rate (APR) of 12% with monthly compounding, the equivalent interest rate for one-month is ____%.

1.00 % ***12%/12 = 1%

Suppose the nominal interest rate is 5.06% and the rate of inflation is 2% in the United States. What is the real interest rate?

3 The relation between real rate and nominal rate is: (1+ Nominal Rate) / (1+ Inflation Rate)= 1+ Real Rate (1+ 5.06%) / (1+ 2%) -1= 3 So the real rate =3%, which means the purchasing power of your savings increase by 3% over the year.

President Trump urges the Federal Reserve to ____ the interest rate to make more investment opportunities profitable. A. Decrease B. He does not care C. Increase

A. Decrease A lower increase rate will make more investment opportunities profitable and (hopefully) cause a higher employment rate.

Generally, if you have an upfront cost at date 0 and benefits in the future, then an increase in the interest rate will _____ the investment's NPV. A. Increase B. Decrease C. Cannot be determined.

B. Decrease Benefits get reduced more

Which of the following statements regarding the timeline is FALSE? A. The APR itself cannot be used as a discount rate. B. The Effective Annual Rate (EAR) indicates the actual amount of interest that will be earned at the end of one year. C. The APR with k compounding periods is a way of quoting the actual interest earned each compounding period. D. Annual Percentage Rate (APR) indicates the amount of simple interest earned in one year. E. The APR is typically greater than the EAR.

E. The APR is typically greater than the EAR. The APR is typically less than the effective annual rate (EAR) because the EAR considers compounding.