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Unformatted text preview: Chapter 5 Interest Rates Answers to Chapter 5 Review Questions 1. An interest rate is the price of using money today rather than in the future. For example, if you want to spend $100 today, you are foregoing interest that could be earned on that $100 if you left it in an interestbearing account. This interest rate is the price of spending the money now. 2. The EAR increases when discounting is more frequent because of compound interest. For a given APR, the EAR increases as compounding increases. 3. The formulas for valuing cash flows require that the interest rate match the length of time between cash flows. Thus, you must match the frequency of the interest rate with the frequency of the cash flows. 4. The total sum of payments on a mortgage must repay the principal and all of the interest that accrues during the mortgage period. Due to the time value of money (and compound interest), the amount of total interest on a 30year mortgage is more than double that of a 15year mortgage. Thus, the mortgage total interest on a 30year mortgage is more than double that of a 15year mortgage....
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This note was uploaded on 08/26/2010 for the course FINA FINA111 taught by Professor Lynnpi during the Spring '09 term at HKUST.
 Spring '09
 LynnPi
 Interest, Interest Rate

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