Topic 1 IWhich of the following statement related to interest rates is correct?
ID: 2798187 • Letter: T
Question
Topic 1 IWhich of the following statement related to interest rates is correct? A Annual interest rates consider the effect of interest carned on reinvested interest B When comparing loans, you should compare the effective annual rates. C Lenders are required by law to disclose the annual interest rate of a loan to prospective D Annual and effective interest rates are equal when interest is compounded monthly. 2 What is the effective annual rate if a bank charges you 9.50 percent compounded quarterly? A 9.62 percent B 9.68 percent C 9.72 percent D 9.84 percent E 9.91 percent 3 You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 8.10 percent compounded daily Loan B offers a rate of 8.25 percent compounded semi-annually. Loan is the better A A the effective annual rate is 8.41 percent B A; the annual percentage rate is 8.41 percent C B the annual percentage rate is D B: the interest is compounded less frequently E B; the effective annual rate is 8.42 percent Topic 2 4 Bert owns a bond that wil pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A coupon B face value C iscount D yield E dirty price 5 Oil Well Supply offers 7.3 pereen coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. T hond if the face value is $1,000 s. What is the market price per he bonds mature in 6 ycars A $989.30 B $991.47 C 5996.48Explanation / Answer
1
When comparing loans you should compare the effective annual rates
2
(1+9.5%/4)^4-1=9.8438%
3
LoanA:(1+8.1%/365)^365-1=8.4361%
Loan B: (1+8.25%/2)^2-1=8.4202%
Hence, Loan B is better because effective annaul rate is 8.42 per cent
4
Face Value
5
Price=37.5/1.0384+37.5/1.0384^2.........37.5/1.0384^12+1000/1.0384^12=991.4745
6
Price=47.5/1.056+47.5/1.056^2.........47.5/1.056^22+1000/1.056^22=893.9889
7
Pay interest that is federally tax free
8
Bond sells at a premium when yield to maturity is less than coupon rate
9
Price is inversely proportional to interest rates..Hence decrease the market price
10
discount rate