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Question;12. Which of the following statements regarding a 15-year;(180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.);a. The remaining balance after three years;will be $125,000 less one third of the interest paid during the first three;years.;b. Because the outstanding balance declines;over time, the monthly payments will also decline over time.;c. Interest payments on the mortgage will;increase steadily over time, but the total amount of each payment will remain;constant.;d. The proportion of the monthly payment that;goes towards repayment of principal will be lower 10 years from now than it;will be the first year.;e. The outstanding balance declines at a;faster rate in the later years of the loan?s life.;13. Which of the following statements regarding a 30-year monthly;payment amortized mortgage with a nominal interest rate of 10% is CORRECT?;a. The monthly payments will decline over;time.;b. A smaller proportion of the last monthly;payment will be interest, and a larger proportion will be principal, than for;the first monthly payment.;c. The total dollar amount of principal being;paid off each month gets smaller as the loan approaches maturity.;d. The amount representing interest in the;first payment would be higher if the nominal interest rate were 7%;rather than 10%.;e. Exactly 10% of the first monthly payment;represents interest.;14. Which of the following statements regarding a 30-year;monthly payment amortized mortgage with a nominal interest rate of 10% is;CORRECT?;a. The monthly payments will increase over;time.;b. A larger proportion of the first monthly;payment will be interest, and a smaller proportion will be principal, than for;the last monthly payment.;c. The total dollar amount of interest being;paid off each month gets larger as the loan approaches maturity.;d. The amount representing interest in the;first payment would be higher if the nominal interest rate were 7%;rather than 10%.;e. Exactly 10% of the first monthly payment;represents interest.;15. A U.S. Treasury bond will pay a lump sum of $1,000 exactly;3 years from today. The nominal interest;rate is 6%, semiannual compounding.;Which of the following statements is CORRECT?;a. The periodic interest rate is greater than;3%.;b. The periodic rate is less than 3%.;c. The present value would be greater if the;lump sum were discounted back for more periods.;d. The present value of the $1,000 would be;smaller if interest were compounded monthly rather than semiannually.;e. The PV of the $1,000 lump sum has a higher;present value than the PV of a 3-year, $333.33 ordinary annuity.;16. A U.S. Treasury bond will pay a lump sum of $1,000 exactly;3 years from today. The nominal interest;rate is 6%, semiannual compounding.;Which of the following statements is CORRECT?;a. The periodic interest rate is greater than;3%.;b. The periodic rate is less than 3%.;c. The present value would be greater if the;lump sum were discounted back for more periods.;d. The present value of the $1,000 would be;larger if interest were compounded monthly rather than semiannually.;e. The PV of the $1,000 lump sum has a smaller;present value than the PV of a 3-year, $333.33 ordinary annuity.;17. 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 less than its effective annual rate.;d. If an investment pays 10% interest;compounded annually, its effective annual rate will be less 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.;18. 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.;19. Which of the following statements is CORRECT?;a. The present value of a 3-year, $150 annuity;due will exceed the present value of a 3-year, $150 ordinary annuity.;b. If a loan has a nominal annual rate of 8%;then the effective rate can never be greater than 8%.;c. If a loan or investment has annual;payments, then the effective, periodic, and nominal rates of interest will all;be different.;d. The proportion of the payment that goes;toward interest on a fully amortized loan increases over time.;e. An investment that has a nominal rate of 6%;with semiannual payments will have an effective rate that is smaller than 6%.;20. Which of the following statements is CORRECT?;a. The present value of a 3-year, $150;ordinary annuity will exceed the present value of a 3-year, $150 annuity due.;b. If a loan has a nominal annual rate of 8%;then the effective rate will never be less than 8%.;c. If a loan or investment has annual;payments, then the effective, periodic, and nominal rates of interest will all;be different.;d. The proportion of the payment that goes;toward interest on a fully amortized loan increases over time.;e. An investment that has a nominal rate of 6%;with semiannual payments will have an effective rate that is smaller than 6%.;21. You are considering two equally risky annuities, each of;which pays $5,000 per year for 10 years.;Investment ORD is an ordinary (or deferred) annuity, while Investment;DUE is an annuity due. Which of the;following statements is CORRECT?;a. The present value of ORD must exceed the;present value of DUE, but the future value of ORD may be less than the future;value of DUE.;b. The present value of DUE exceeds the;present value of ORD, while the future value of DUE is less than the future;value of ORD.;c. The present value of ORD exceeds the;present value of DUE, and the future value of ORD also exceeds the future value;of DUE.;d. The present value of DUE exceeds the;present value of ORD, and the future value of DUE also exceeds the future value;of ORD.;e. If the going rate of interest decreases;from 10% to 0%, the difference between the present value of ORD and the present;value of DUE would remain constant.;22. You are considering two equally risky annuities, each of;which pays $5,000 per year for 10 years.;Investment ORD is an ordinary (or deferred) annuity, while Investment;DUE is an annuity due. Which of the;following statements is CORRECT?;a. A rational investor would be willing to pay;more for DUE than for ORD, so their market prices should differ.;b. The present value of DUE exceeds the;present value of ORD, while the future value of DUE is less than the future;value of ORD.;c. The present value of ORD exceeds the;present value of DUE, and the future value of ORD also exceeds the future value;of DUE.;d. The present value of ORD exceeds the;present value of DUE, while the future value of DUE exceeds the future value of;ORD.;e. If the going rate of interest decreases;from 10% to 0%, the difference between the present value of ORD and the present;value of DUE would remain constant.

 

Paper#44996 | Written in 18-Jul-2015

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