Fin 534 Quiz 3

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Question 1

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2 out of 2 points

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Answer

Selected Answer:

The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.

Correct Answer:

The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.

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Question 2

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2 out of 2 points

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Answer

Selected Answer:

The outstanding balance declines at a faster rate in the later years of the loan’s life.

Correct Answer:

The outstanding balance declines at a faster rate in the later years of the loan’s life.

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Question 3

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2 out of 2 points

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Answer

Selected Answer:

The discount rate increases.

Correct Answer:

The discount rate increases.

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Question 4

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0 out of 2 points

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Answer

Selected Answer:

If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

Correct Answer:

A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.

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Question 5

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0 out of 2 points

Which of the following statements is CORRECT?

Answer

Selected Answer:

If you solve for I and get a negative number, then you must have made a mistake.

Correct Answer:

If CF0

is positive and all the other CFs are negative, then you can still solve for I.

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Question 6

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2 out of 2 points

Which of the following statements is CORRECT?

Answer

Selected Answer:

Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

Correct Answer:

Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

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Question 7

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2 out of 2 points

A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

Answer

Selected Answer:

The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

Correct Answer:

The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

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Question 8

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2 out of 2 points

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Answer

Selected Answer:

The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

Correct Answer:

The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

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Question 9

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2 out of 2 points

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Answer

Selected Answer:

The periodic rate of interest is 2% and the effective

rate of interest is greater than 8%.

Correct Answer:

The periodic rate of interest is 2% and the effective

rate of interest is greater than 8%.

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Question 10

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2 out of 2 points

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while...
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