2.
Which of the following statements is NOT CORRECT, assuming positive interest rates?
a.
A 5year $100 annuity due will have a higher present value than similar ordinary
annuity.
b.
A 15year, $100,000 mortgage will have larger monthly payments than an otherwise
similar 30year mortgage.
c.
If an investment pays 10% interest compounded annually, its effective rate will also
be 10%.
d.
Securities A and B offer the same nominal rate of interest, but A pays interest
quarterly and B pays semiannually.
Investment B will have the higher present value.
e.
An investment's nominal interest rate will always be equal to or greater than its
effective annual rate.
Time value concepts
Answer: e
EASY
3.
Which of the following bank accounts has the highest effective annual return?
a.
An account that pays 10% nominal interest with monthly compounding.
b.
An account that pays 10% nominal interest with daily compounding.
c.
An account that pays 10% nominal interest with annual compounding.
d.
An account that pays 9% nominal interest with daily compounding.
e.
An account that pays 9% nominal interest with monthly compounding.
Effective annual rate
Answer: b
EASY
4.
Your bank account pays an 8% nominal rate of interest.
The interest is compounded
quarterly.
Which of the following statements is CORRECT?
a.
The periodic rate of interest is 2% and the effective rate of interest is 4%.
b.
The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
c.
The periodic rate of interest is 4% and the effective rate of interest is 8%.
d.
The periodic rate of interest is 8% and the effective rate of interest is 8%.
e.
The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
Quarterly compounding
Answer: e
EASY
5.
Which of the following is NOT CORRECT?
a.
The present value of a 5year, $100 annuity due will exceed the present value of a 5
year, $100 ordinary annuity.
b.
If a loan has a nominal rate of 10%, then the effective rate can never be less than
10%.
c.
If there is annual compounding, then the effective, periodic, and nominal rates of
interest are all the same.
d.
An investment that compounds interest semiannually, and has a nominal rate of 10%,
will have an effective rate less than 10%.
e.
The proportion of the payment of a fully amortized loan that goes toward interest
declines over time.
Time value concepts
Answer: d
MEDIUM
6.
The present value of a single future sum:
a.
increases as the number of discount periods increases.
b.
is generally larger than the future sum.
c.
depends upon the number of discount periods.
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increases as the discount rate increases
Answer:
c;
Difficulty:
1;
Keywords:
Present Value
9.
Two brothers each open IRAs in 2004 and plan to invest $2,000 per year for the next
30 years.
John makes his first deposit on January 1, 2004, and will make all future
deposits on the first day of the year.
Bill makes his first deposit on December 31,
2004, and will continue to make his annual deposits on the last day of each year.
At
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 Spring '10
 lynn
 Time Value Of Money, Bank Accounts

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