Question

7) A bank offers a credit card with an APR of 18 percent, with quaterly compounding. What is the effective annual rate (EAR)?

8)Which of the following investments will attain the highest future value?

a) $1,300 invested at an annual interest rate of 6% for 12 years

b) $1,500 invested at an interest rate of 4.75% (monthly compounding) for 10 years

c) $1,300 invested at an interest rate of 3.25% (quaterly compunding) for 10 years

9)All other things held equal, the higher the discount rate on an investment, the lower the present value of its future cash flows. TRUE OR FALSE?

10) The time value of money is based on the belief that people have a _________time preference for consumption. This means present consumption is preferable than future consumption.

A)NEGATIVE

B) POSITIVE

C) NEUTRAL

Answer 1

7.

APR = 18%

Number of compounding in year = 4

Effective annual rate = [(1 + 18% / 4) ^ 4]- 1

= 1.1925 - 1

= 19.25%

Effective annual rate is 19.25%.

8.

a.

Future value = $1,300 × (1 + 6%) ^ 12

= $1,300 × 2.012

= $2,615.86.

Future value of $1,300 deposit today is $2,615.86.

b.

Future value = $1,500 × [(1 + 4.75% /12) ^ (10 × 12)]

= $1,500 × 1.6065

= $2,409.76.

Future value of $1,500 deposit today is $2,409.76.

c.

Future value = $1,300 × [(1 + 3.75% / 4) ^ (10 × 4)]

= $1,300 × 1.4525

= $1,888.19.

Future value of $1,300 deposit today is $1,888.19.

Future value of investment (A) that is $1,300 invested at an annual interest rate of 6% for 12 years is highest.

9.

All other things held equal, the higher the discount rate on an investment, the lower the present value of its future cash flows.

Statement is true.

10.

The time value of money is based on the belief that people have a Positive time preference for consumption. This means present consumption is preferable than future consumption.

Option (B) is correct answer.