Chapter 4 More Interest Formulas 
Results
You answered 8 out of 23 questions correctly, for a score of 34.783%.
1.
Correct. You answered: c. $2,307.
If $175 is deposited at the end of each year in a savings account that pays 6%
interest per year, approximately how much money will be in the account at the
end of 10 years?
The correct answer was: c. $2,307.
$2,307
References:
Solution F = A(F/A, i, n) = 175(F/A, 6%, 10) = 175(13.181) =
$2,306.68
2.
Correct. You answered: a. Greater than.
Your annual credit card interest rate is 8%. If monthly compounding is used in
lieu of annual compounding, the effective interest rate is _______ the nominal
interest rate.
The correct answer was: a. Greater than.
Greater than
References:
Solution: The answer is (a), greater than. The annual nominal
interest does not take into account the compounding of interest that occurs
throughout the year while the effective interest rate takes the compounding into
account. The more we compound in a given time period, the greater the interest
rate.
3.
Incorrect. You answered: c. 80%.
A local pawnshop buys your TV set for $200 and resells it back to you for $250 a
month later. What nominal interest rate is implied in this arrangement?
The correct answer was: d. 300%.
300%
References:
Solution: Interest = $50 in one month
i = 50/200 = 25%
r = im = 25(12) = 300%
4.
Correct. You answered: c. 10.28%.
What nominal interest rate, compounded monthly, is equivalent to a 10.78%
effective rate?
The correct answer was: c. 10.28%.
10.28%
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentReferences:
Solution: i
e
= [1 + (r/n)]
n
− 1
0.1078 = [1 + (r/12)]
12
− 1
1 + r/12 = 1.1078
1/12
= 1.008567834
r = 0.1028 or 10.28%
5.
Correct. You answered: d. 16.18% .
Your new credit card has a 15% nominal interest rate which is compounded daily.
This is equivalent to an effective annual interest rate of about
The correct answer was: d. 16.18% .
16.18%
References:
Solution: i
e
= (1 + r/m)
m
−1 = (1 + 0.15/365)
365
− 1 = 16.18%
6.
Incorrect. You answered: c. 15.00% .
You open a credit card account that charges 1.25% interest each month on the
unpaid balance. What is the effective annual interest rate?
The correct answer was: d. 16.08%.
16.08%
References: Solution:
We are given a 1.25% effective interest rate per month. So, i = 0.0125
Using i = (1 + i )
m
− 1
where i
a
is the effective interest rate per year and m is the number of
compounding periods in a year, we obtain:
i
a
= (1 + 0.0125)
12
− 1 = 16.08% effective annual interest
7.
Correct. You answered: c. 21%.
Your credit card charges you 1.75% interest per month on your account balance.
This is equivalent to a nominal annual interest rate of
The correct answer was: c. 21%.
21%
References:
Solution: The nominal interest rate is the annual interest rate that
does not take into account the effect monthly compounding. Nominal interest
rate = 1.75% x 12 = 21%
8.
Correct. You answered: b. 19.51%.
The effective interest rate on a loan is 21.35%. If there are 12 compounding
This is the end of the preview.
Sign up
to
access the rest of the document.
 Summer '11
 Watsonh
 advisor, developer, Bank Accounts

Click to edit the document details