1

1. You plan to purchase a car. The dealer is offering special financing at an annual percentage rate (APR) of 8 percent for 100 percent of the car value. The inflation premium is 3.5 percent. If the pure rate in the market is 3 percent, what is the risk premium using the multiplicative form?

   7.48%

   1.31%

   6.24%

   2.69%

   4.72%

3 points

QUESTION 2

1. The real rate is 4.2 percent and the nominal APR is 7 percent. What is the expected inflation premium? Use exact formulation.

   7.48%

   2.69%

   1.31%

   6.24%

   4.72%

3 points

QUESTION 3

1. The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the nominal APR rate? Use exact formulation.

   8.75%

   11.39%

   6.00%

   6.09%

   11.00%

3 points

QUESTION 4

1. The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the real rate? Use exact formulation.

   6.09%

   11.00%

   11.39%

   8.75%

   6.00%

3 points

QUESTION 5

1. The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the risk-free rate? Use exact formulation. (Hint: Set risk premium equal to zero!)

   7.50%

   7.62%

   8.75%

   6.00%

   6.09%

3 points

QUESTION 6

1. The APR on a financial security is 12 percent. If the inflation premium is 4 percent and the pure rate is 3 percent, what risk premium is required by the market?

   4.56%

   3.81%

   5.00%

   5.37%

   4.74%

3 points

QUESTION 7

1. Use the following information for this and the following three questions. A bank wishes to earn a pure rate of 2 percent, and the inflation premium is 1.6%. The bank uses the Fair Issac Corporation (FICO) score to determine car loan rate for its customers. Based on an automobile loan applicants FICO score, it uses the following risk premium adjustment to the rate it quotes.

   FICO Score	Risk Premium %
   >740	1.00%
   720-739	1.10%
   700-719	1.30%
   680-699	1.60%
   660-679	1.90%
   640-659	2.20%
   620-639	2.50%
   <620	7.50%

   What annual percentage rate will it quote to John Smith who has a FICO score of 645?

   5.91%

   6.22%

   11.40%

   5.60%

   5.29%

3 points

QUESTION 8

1. If John Smiths FICO score drops to 615, what will be thepercent changein the APR?

   29.43%

   29.43%

   92.91%

   11.40%

   92.91%

3 points

QUESTION 9

1. Jane Smith applies for a car loan to the bank and the bank quotes her an APR of 4.98 percent. In which range does Jane Smiths FICO score fall?

   660-679

   680-699

   720-739

   700-719

   >740

3 points

QUESTION 10

1. The average FICO score in the United States is about 692. What is the APR rate offered by the bank to the average customer?

   11.40%

   5.29%

   5.91%

   5.60%

   6.22%