If APR = 10%, what is the EAR (effective annual rate) for quarterly compounding?

If APR = 10%, what is the EAR (effective annual rate) for quarterly compounding?

a. 10.00%

b. 10.38%

c. 12.36%

d. 13.36%

e. 15.52%

2. If the current one year CD rate is 3% and the best estimate of one year CD which will be available one year from today is 5%, what is the current two year CD rate with 1% liquidity premium?

a. 4.0%

b. 4.5%

c. 5.0%

d. 5.5%

e. 6.0%

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

a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

c. A bank loan’s nominal interest rate will always be equal to or greater than its effective annual rate.

d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

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4. You have a chance to buy an annuity that pays $550 at the __beginning__ of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

a. $1,412.84

b. $1,487.20

c. $1,565.48

d. $1,643.75

e. $1,725.94

5. Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the __beginning__ of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?

a. 15.05

b. 16.36

c. 17.22

d. 18.08

e. 18.

6. How much do you need to save each year from two years from today and onward so that you can have $1,000 six years from today at 10% interest rate?

a. $150

b. $164

c. $173

d. $183

e. $190

7. Jennifer can make a 100,000 down payment to buy a house. The house is $380,000 and she was offered 30-year mortgage and 15-year mortgage at a market rate of 12%. How much more interest would Jennifer pay if she took out a 30-year mortgage instead 15-year mortgage?

a. $106,430

b. $413,957

c. $431,959

d. $450,790

e. $490,250

8. How long will it take for you to pay off $1,500 charged on your credit card, if you plan to make the minimum payment of $15 per month and the credit card charges 24% per annum?

a. 10 months

b. 35 months

c. 10 years

d. 863 months

e. You may not be able to pay off the debt

9. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?

a. 2.59%

b. 2.88%

c. 3.20%

d. 3.52%

e. 3.87%

10. Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%. Assuming the pure expectations theory is correct, what is the market’s forecast for 1-year rates 1 year from now?

a. 7.36%

b. 7.75%

c. 8.16%

d. 8.59%

e. 9.04%