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Unformatted text preview: Corporate Finance: The Core (Berk/DeMarzo) Chapter 5  Interest Rates 5.1 Interest Rate Quotes and Adjustments 2) Which of the following equations is incorrect? A) 1 k EAR +  1 = APR B) Equivalent n Period Discount Rate = (1 + r ) n  1 C) 1 + EAR = 1 k APR k + D) Interest Rate per Compounding Period = / APR k periods year Answer: A Explanation: A) D) Diff: 2 Topic: 5.1 Interest Rate Quotes and Adjustments Skill: Conceptual 3) The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to: A) 8.30% B) 8.33% C) 8.00% D) 8.24% Answer: A Explanation: A) E D) Diff: 1 Topic: 5.1 Interest Rate Quotes and Adjustments Skill: Analytical 4) The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is closest to: A) 10.52% B) 10.25% C) 10.38% D) 10.00% Answer: C Explanation: A) EAR = (1 + APR / k ) k  1 = (1 + .10 / 4) 4  1 = .1038 or 10.38% D) Diff: 1 Topic: 5.1 Interest Rate Quotes and Adjustments Skill: Analytical 5) The effective annual rate (EAR) for a savings account with a stated APR of 4% compounded daily is closest to: A) 4.00% B) 4.10% C) 4.08% D) 4.06% Answer: C Explanation: A) EAR = (1 + APR / k ) k  1 = (1 + .04 / 365) 365  1 = .04088 or 4 .08% D) Diff: 1 Topic: 5.1 Interest Rate Quotes and Adjustments Skill: Analytical Use the table for the question(s) below. Consider the following investment alternatives: Investment Rate Compounding A 6.25% Annual B 6.10% Daily C 6.125 Quarterly D 6.120 Monthly 6) Which alternative offers you the highest effective rate of return? A) Investment A B) Investment B C) Investment C D) Investment D Answer: D Explanation: A) D) EAR (A) = (1 + APR / k ) k  1 = (1 + .0625 / 1) 1  1 = . 0625 or 6.250% EAR (B) = (1 + APR / k ) k  1 = (1 + .0610 / 365) 365  1 = .06289 or 6.289% EAR (C) = (1 + APR / k ) k  1 = (1 + .06125 / 4) 4  1 = .06267 or 6.267% EAR (D) = (1 + APR / k ) k  1 = (1 + .0612 / 12) 12  1 = .06295 or 6.300% Diff: 2 Topic: 5.1 Interest Rate Quotes and Adjustments Skill: Analytical You are purchasing a new home and need to borrow $250,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.25% APR for a 30 year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay 2 points, they can year fixed rate mortgage....
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This note was uploaded on 12/28/2009 for the course FEWEB CORPFIN taught by Professor Dorsman during the Spring '09 term at Vrije Universiteit Amsterdam.
 Spring '09
 dorsman

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