Question

Previous Page Next Page Page 4 of 3 Question 4 (3.3 points) Which of the following statements is most correct? The first payment under a 3-year, annual payment, amortized loan for $1,000 will include a smaller percentage (or fraction) of interest if the interest rate is 5 percent than if it is 10 percent. If you are lending money, then, based on effective interest rates, you should prefer to lend at a 10 percent nominal, or quoted, rate but with semiannual payments, rather than at a 10.1 percent nominal rate with annual payments. However, as a borrower you should prefer the annual payment loan. The value of a perpetuity (say for $100 per year) will approach infinity as the interest rate used to evaluate the perpetuity approaches zero. Statements a, b, and are all true. Statements b and care true. Previous Page Next Page Page 4 of 30

Answer 1

All the three statements are correct.

Higher the interest rate, higher the interest component.

EAR = (1 + APR/n)^n - 1 =  (1 + 10%/2)^2 - 1 = 10.25% > 10.1%

Value of perpetuity = CF / r, if r tends to zero, Value tends to infinity.