QUESTION 1 Which of the following statements is FALSE? Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. The annual percentage rate indicates the amount of simple interest earned in one year. The effective annual rate indicates the amount of interest that will be earned at the end of one year. The annual percentage rate indicates the amount of interest including the effect of compounding. QUESTION 2 The effective annual rate (EAR) for a loan with a stated APR of 6% compounded monthly is closest to: O 6.00% 6.30% O 6.66% 6.17% QUESTION 3 Use the table for the question(s) below. Consider the following investment alternatives: Investment Rate Compounding A 6.25% Annual B 6.10% Daily 6.125 Quarterly D 6.120 Monthly Which alternative offers you the highest effective rate of return? Investment A Investment B Investment C Investment D QUESTION 4 Use the table for the question(s) below. Consider the following investment alternatives: Investment Rate Compounding 6.25% Annual B 6.10% Daily C 6.125 Quarterly D 6.120 Monthly The highest effective rate of return you could earn on any of these investments is closest to 6.295% 6.250% 6.267% 6.310% QUESTION 5 Wesley Mouch's auto loan requires monthly payments and has an effective annual rate of 7.43%. The APR on this auto loan is closest to: O 7.50% 07.19% O 7.43% 0 7.62% QUESTION 6 Use the information for the question(s) below. You are in the process of purchasing a new automobile that will cost you $27,500. The dealership is offering you either a $2500 rebate (applied toward the purchase price) or 1.9% financing for 48 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 6.5% for 48 months. If you take the $2500 rebate and finance your new car through your credit union your monthly payments will be closest to: O $799 $520 $573 $593 QUESTION 7 Use the information for the question(s) below. You are in the process of purchasing a new automobile that will cost you $27,500. The dealership is offering you either a $2500 rebate (applied toward the purchase price) or 1.9% financing for 48 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 6.5% for 48 months If you forgo the $2500 rebate and finance your new car through the dealership your monthly payments (with payments made at the end of the month) will be closest to: O $799 $595 $573 $520 QUESTION 8 Which of the following statements is FALSE? Real interest rates indicate the rate at which your money will grow if invested for a certain period. The relationship between the investment term and the interest rate is called the term structure of interest rates. The shape of the yield curve will be strongly influenced by interest rate expectations. The yield curve is a potential leading indicator of future economic growth. QUESTION 9 If the current inflation rate is 2.2% and you are earning a real rate of return on investment of 3.8%, then the nominal rate on this investment closest to (please using the formula; NOT the approximation): O 6.2% 06.08% O 6.0% O 6.8% QUESTION 10 Use the table for the question(s) below. Suppose the term structure of interest rates is shown below Term 1 year 2 years 3 years 5 years 10 years 20 years Rate (EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15% What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? Inverted; Higher Inverted; Lower Normal; Higher Normal; Lower
