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Previous Page Next Page Page 4 of 30 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 c are all true. Statements b and c are true. Page 4 of 30 Next Pige Previous Page O of 30 questions saved Submit Quiz

Answer 1

Answer 4:

Correct answer is:

Statements a, b,and c are all true.

Explanation:

Statement a:

The first payment under a 3 year annual payment amortized loan for $1000 will include:

1. amount of $100 as interest if interest rate is 10%

2. amount of $50 as interest if interest rate is 5%

Hence statement a is true.

Statement b:

Interest rate of 10% nominal with semiannual payment will have effective annual rate of ((1 + 10%/2)² -1) = 10.25%.

Hence if you are a lender you will prefer 10% nominal with semiannual payments rather than a 10.1% nominal rates with annual payment.

Hence statement b is also true.

Statement c:

The value of annual perpetuity of say $100 is = $100 / Interest rate.

Hence when interest approaches zero, the value will approach infinity.

Hence statement c is also true.

As such statements a, b, and a are true.

Answer 5:

Correct statements checked are:

✓ An Increase in the lump sum amount An decrease in the number of compounding periods A decrease in N An increase in the interest rate A decrease in the lumpsum amount A decrease in the interest rate An increase in N An increase in the number of compounding periods per year

Explanation:

Present value (PV) of lump sum say $500 to be received in N years with interest rate of i from today is = $500 / (1 + i) ^N

As such PV will increase when:

Lump sum increases

N decreases

i decreases

As number of compounding period decreases i decreases.