I. Simple interest calculations assume the interest earned is never reinvested. II. The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption. III. Earning a 5% interest rate with annual compounding is better than earning a 4.95% interest rate with semiannual compounding. IV. For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows and the future value of the same annuity will be greater than the sum of the cash flows. All statements are correct. Two statements are incorrect. O Three statements are incorrect. Only one statement is incorrect.

I. Simple interest calculations assume the interest earned is never reinvested. II. The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption. III. Earning a 5% interest rate with annual compounding is better than earning a 4.95% interest rate with semiannual compounding. IV. For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows and the future value of the same annuity will be greater than the sum of the cash flows. All statements are correct. Two statements are incorrect. O Three statements are incorrect. Only one statement is incorrect.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assess the following statements: Simple interest calculations assume the interest earned is never reinvested. The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption. Earning a 5% interest rate with annual compounding is better than earning a 4.95% interest rate with semiannual compounding. For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows and the future value of the same annuity will be greater than the sum of the cash flows. a. Three statements are incorrect. b. Two statements are incorrect. c. Only one statement is incorrect. d. All statements are correct.
Which of the following statements correctly describes aspects of simple interest as discussed in lectures? Group of answer choices A) With simple interest, the future value of any cash flow is simply its current value discounted back at a rate of r% per period for n periods. B) None of the other statements are correct C) A loan that has been created that pays simple interest, will involve interest payments that are calculated on the basis of both the principal amount borrowed as well as any interest that has accumulated to date. D) By convention, simple interest is the main method used for the pricing of long-term bonds. E) More than one of the other statements are correct
Which of the following refers to the ratio of the interest to the principal repayment on an annual unpaid loan? A. it increases as the loan gets older О в. it decreases as the loan gets older O c. it remains constant over the life of the loan O D. it changes according to the level of market interest rates during the life of the loan
Which of the following is false? I. A lower interest rate would increase the present value of an investment. II. With compound interest method, interest is earned every period only on the orginal starting amount. III. "PMT" in the FVA formula tells us the periodic mortage payments for a fixed-rate fully amortized loan. O A. I, II, and III O B. III only O C. II and III only D. I only
which of the following statements are true? 1. there is an inverse relationship between interest rates and future vales 2. the effective annual interest rate (EAR) will be higher than the annual percentage rate (APR) for a loan that compounds interest annually 3. there is an inverse relationship between present value and interest rates 4. all else equal, the more frequent interest in compounded on a loan, the more interest you will have to pay.
Which of the following statements is CORRECT? Question 2 options: a) The proportion of the payment that goes toward interest on a fully amortized loan increases over time. b) An investment that has a nomiral rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. c) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. d) The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. e) if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.
Compound interest can best be described as: a. interest earned on the original principal b. the discount rate c. interest on interest only d. interest on interest and interest on original principal When we consider the time value of money, a peso received in the future: a.is worth less than a peso received today b. is worth more than a peso received today c. is worth the same as a peso received today d. depends on the compounding used to determine the relationship to a peso received today
Choose the best answer from the choices provided. As a loan is paid off, the monthly payment increases debt and interest portions do not change each interest period interest potion of the fixed payment increases debt portion of the fixed payment increases
Which statement is true about an annual percentage rate (APR)? A) it is of little interest to the average borrower B) it is a simple way to compare all the various elements of different loans C) it is reduced every time you make an payment D) it is equal to the interest rate times the principal
Toms UI IVesuTment to ychciut ed as a cost of borrowing to compensate the opportunity costs of the bank with I to the cash loaned to you. Moreover, the interest rate is usually expressed as nual percentage rate. activity ctions: On the space provided, write TRUE if the idea being expressed is correct and FALSE if otherwise. 1. In the most loan amortization schedules, amortization of discount or premium of the loan increases over time. 2. The process of obtaining future values is called discounting. 3. An annuity in which cash flows occur at the end of each period is called annuity. age
In the PMT function, what is not true about the rate argument? Group of answer choices It assumes an annual interest rate. It can contain references to fields. It is optional. It reflects the interest charged on a loan.
Which of the following statements regarding fixed-rate loans is true? Group of answer choices a. Fixed-rate loans are preferable if interest rates are expected to rise. b. The cost of fixed-rate loans increases with an increase in the market interest rate. c. The cost of fixed-rate loans decreases with a decrease in the market interest rate. d. Fixed-rate loans are preferable if interest rates are expected to fall. e. Fixed-rate loans have periodic adjustment dates, at which time the interest rate and monthly payment are adjusted as necessary.

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