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Unformatted text preview: FIN 534-Homework Chapter 4 1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT? Answer C. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 2. Which of the following statements is CORRECT? Answer D. If you solve for 1 and get a negative number, then you must have made a mistake. 3. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside? Answer D. 0.30% Nominal rate, Riverside 6.5% Nominal rate, Midwest 7.0% Periods/yr. Riverside 12 Periods/yr. Midwest 1 EFF% Riverside= (1+ (rnom/N)) N-1= 6.7% EFF% Midwest 7.00% Difference 0.30% 4. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20 th birthday, and he just made a 6 th payment into the fund. The grandfather (or his estates payment into the fund....
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