Podcast
Questions and Answers
The stated interest rate is the interest rate expressed:
The stated interest rate is the interest rate expressed:
- As if it were compounded one time per year.
- In terms of an effective rate.
- In terms of the rate charged per day.
- As the quoted rate compounded by 12 periods per year.
- In terms of the interest payment made each period. (correct)
Janis just won a scholarship that will pay her $500 a month, starting today, for the next 48 months. Which term best describes these scholarship payments?
Janis just won a scholarship that will pay her $500 a month, starting today, for the next 48 months. Which term best describes these scholarship payments?
- Ordinary perpetuity
- Perpetuity due
- Consol
- Annuity due (correct)
- Ordinary annuity
Anna pays 0.85 percent interest monthly on her credit card account. When the interest rate is compounded annually, it is referred to as the:
Anna pays 0.85 percent interest monthly on her credit card account. When the interest rate is compounded annually, it is referred to as the:
- Stated rate.
- Quoted rate.
- Simplified rate.
- Effective annual rate. (correct)
- Annual percentage rate.
Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
Which one of the following statements concerning annuities is correct?
Which one of the following statements concerning annuities is correct?
All else held constant, the future value of an annuity will increase if you:
All else held constant, the future value of an annuity will increase if you:
A 30-year home mortgage is a classic example of:
A 30-year home mortgage is a classic example of:
Which one of the following has the highest effective annual rate?
Which one of the following has the highest effective annual rate?
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
Bill just financed a used car through his credit union, requiring payments of $275 a month for five years. What type of loan does Bill have?
Bill just financed a used car through his credit union, requiring payments of $275 a month for five years. What type of loan does Bill have?
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Study Notes
Interest Rates and Payment Structures
- Stated interest rate: Expressed in terms of the interest payment made each period.
- Effective annual rate: Represents the annual rate that accounts for compounding, unlike the stated annual percentage rate.
Types of Annuities
- Annuity due: Payments begin immediately, as noted in scholarship payments of $500 monthly for 48 months.
- Ordinary annuity: Payments occur at the end of each period, exemplified by a typical 30-year home mortgage.
Monthly Interest Rates
- The annual percentage rate (APR) is derived by multiplying the monthly rate by 12. For example, a 1% monthly rate results in an APR of 12%.
- Effective annual rate may exceed the stated APR due to the effects of compounding. For a 12.9% APR, the effective rate is higher.
Value Calculations for Annuities
- Future value of an annuity: Increased by extending the time period while keeping other factors constant.
- The present value of an annuity is not simply the cash flow divided by the discount rate.
Compounding Frequency
- Compounding frequency affects the effective annual rate: 6% compounded daily yields the highest rate compared to monthly, quarterly, semiannually, or biennially.
Types of Loans
- An amortized loan involves fixed payments that cover both principal and interest over time, as demonstrated through Bill’s $275 monthly payment for five years.
- Distinction from interest-only loans, complex loans, or lump-sum arrangements.
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