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FIN221_homework_02_answers - Homework#2(chapters 2 6 Answer...

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Homework #2 (chapters 2, 6) Answer Section MULTIPLE CHOICE 1. ANS: C PTS: 1 DIF: Easy OBJ: Part I TYPE: Problems TOP: PV of a lump sum 2. ANS: E PTS: 1 DIF: Easy OBJ: Part I TYPE: Problems TOP: Interest rate on a simple lump sum investment 3. ANS: E PTS: 1 DIF: Easy OBJ: Part I TYPE: Problems TOP: PV of an ordinary annuity 4. ANS: B PTS: 1 DIF: Easy OBJ: Part I TYPE: Problems TOP: PV of an annuity due 5. ANS: B PTS: 1 DIF: Easy/Medium OBJ: Part I TYPE: Problems
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TOP: PV of a lump sum, semiannually 6. ANS: D PTS: 1 DIF: Medium OBJ: Part I TYPE: Problems TOP: FV of an uneven cash flow stream 7. ANS: E PTS: 1 DIF: Medium OBJ: Part I TYPE: Problems TOP: FV of a lump sum, monthly 8. ANS: C PTS: 1 DIF: Medium OBJ: Part I TYPE: Problems TOP: Interest charges, simple interest 9. ANS: D PTS: 1 DIF: Hard OBJ: Part I TYPE: Problems TOP: Saving to start a business 10. ANS: D
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The investment with the highest nominal rate and most frequent compoundings will have the highest effective rate. For this reason, Bank 4 (statement d) dominates the Banks 1-3 (statements a, b, and c). Therefore, Bank 4's effective rate (8.328%) must be calculated and compared to Bank 5's effective rate (8.2%). Therefore, statement d is the correct choice. PTS: 1 DIF: Easy OBJ: Part I TYPE: Conceptual TOP: Effective annual rate 11. ANS: E If the nominal rate is 8% and there is quarterly compounding, the periodic rate must be 8%/4 = 2%. The effective rate will be greater than the nominal rate; it will be 8.24%. So the correct answer is statement e.
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