Question 1

A $10,000, one-month loan pays an annualized interest rate of 10 percent. The dollar amount of interest received from the loan is

Accepted Answer

The interest received from a one-month loan would be the same whether the interest is simple, compounded monthly, or compounded quarterly because the compounding effect only applies to interest calculations over multiple periods within the year. Since the loan term is only one month, there is no opportunity for the interest to be compounded multiple times within the loan period, making the interest amount the same in all scenarios.

Question 2

A $1,000, 7 percent deposit pays interest compounded monthly. After six months, the deposit balance is $__________.

Accepted Answer

The formula for calculating compound interest is:

A = P(1 + r/n)^(nt)

Where: 
A = the final amount 
P = the principal amount 
r = the annual interest rate (as a decimal) 
n = the number of times the interest is compounded per year 
t = the number of years

In this case: 
P = $1,000 
r = 7% = 0.07 
n = 12 (since interest is compounded monthly) 
t = 0.5 (since 6 months is half a year)

Plugging these values into the formula:

A = 1000(1 + 0.07/12)^(12*0.5) 
A = 1000(1.005833)^6 
A = $1,035.96

Rounded to the nearest whole dollar, the deposit balance after six months is $1,036. Therefore, the best choice is A.

Question 3

The present value of an asset can be found by __________ the future value.

Accepted Answer

The present value of an asset can be found by discounting the future value, which means finding the worth of an asset in present time by considering the time value of money and applying a discount rate to the future value. Stripping refers to separating a financial instrument into its component parts, compounding is the process of calculating compound interest on an investment, and annualizing is calculating a value for a whole year based on partial year data.

Question 4

Which of the following is the correct formula for calculating simple interest?

Accepted Answer

The correct formula for calculating simple interest is Interest = Principal × Rate × Time.

Question 5

Luther Schwarz currently has a balance of $838.55 in his savings account. __________ years ago, Luther deposited $500 in his savings account, which pays an annual interest rate of 9 percent, compounded annually.

Accepted Answer

To find the number of years, we need to use the formula for compound interest:
A = P(1+r/n)^(nt), where A is the ending balance, P is the principal (initial deposit), r is the annual interest rate expressed as a decimal, n is the number of times interest is compounded per year, and t is the number of years.

We know P is $500, r is 0.09, n is 1 (compounded annually), and A is $838.55. We can solve for t:

$838.55 = $500(1+0.09/1)^(1t)
$838.55/$500 = 1.6771 = (1.09)^t
ln(1.6771) = t*ln(1.09)
t = ln(1.6771)/ln(1.09) ≈ 6

Therefore, Luther deposited the $500 about 6 years ago. The best choice is C) 6.

Question 6

A 100-year, $1,000 loan that pays a 6 percent simple annual interest rate pays a total amount of interest of

Accepted Answer

Simple interest is calculated as principal amount times the interest rate times the number of years. So, $1,000 * 6% * 100 = $6,000.

Question 7

The dollar amount of interest is largest for a four-year loan if the interest is compounded

Accepted Answer

The interest amount is largest when it is compounded more frequently. Compounding daily means there are 1,460 compounding periods in a four-year period, while monthly compounding only has 48 compounding periods in four years. Therefore, the interest will be highest if the interest is compounded daily.

Question 8

Buddy Bolly just received his annual bank statement. One year ago, Buddy deposited $10,000 in a savings account. Today, his balance is $10,509.45. Buddy's savings account interest is compounded quarterly. Buddy received an annualized interest rate of __________ percent.

Accepted Answer

To find the annualized interest rate, we can use the formula:

A = P(1 + r/n)^(nt)

where:
A = the ending balance ($10,509.45)
P = the principal (initial deposit of $10,000)
r = the annual interest rate (what we want to solve for)
n = the number of times interest is compounded per year (4, since it's compounded quarterly)
t = the number of years (1)

Plugging in the values we know, we get:

$10,509.45 = $10,000(1 + r/4)^(4*1)

Simplifying:

1.050945 = 1 + r/4

0.050945 = r/4

r = 0.20378 (rounded to 5 decimal places)

Multiplying by 100 to get a percentage:
r = 20.378%

Rounding to the nearest whole number gives us a final answer of:

B) 5

Question 9

An individual pays $4,000 for a $5,000 face value, coupon-bearing bond that pays $400 per year and will be held until it matures in ten years. The current yield on this bond is

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the purchase price of the bond. Here, the annual coupon payment is $400, and the purchase price is $4,000. Thus, the current yield is $400 / $4,000 = 0.10 or 10 percent.

Question 10

The total amount of cash inflows a lender would receive on a $600 two-year loan with a simple annual interest rate of 8 percent is equal to

Accepted Answer

The formula for simple interest is I = P x r x t, where I is the interest, P is the principal, r is the annual interest rate, and t is the time in years.

In this case, we have: 
P = $600 
r = 0.08 (since the interest rate is given as 8 percent) 
t = 2

So, the interest earned over the two-year loan period is: 
I = $600 x 0.08 x 2 
I = $96

Therefore, the total amount of cash inflows (i.e. principal + interest) that the lender would receive is: 
$600 + $96 = $696

Therefore, the answer is D, $696.

Question 11

Paul Oldy just purchased a $2,000 face value bond with. The bond pays $45 in interest semiannually. Paul could sell the bond today for $2,050. The current yield on this bond is __________ percent.

Accepted Answer

To calculate the current yield, we divide the annual interest payment by the current market price of the bond:

Annual interest payment = 2 * $45 = $90
Current yield = ($90 / $2,050) x 100% = 4.39%

Therefore, the answer is D) 4.39%.

Question 12

The most widely used measure of interest rates in bond markets is the

Accepted Answer

The yield to maturity takes into account the current market price of the bond, the future coupon payments, and the final principal repayment to calculate the overall return an investor will receive if they hold the bond until maturity. It is therefore considered the most accurate measure of the interest rate on a bond. The coupon rate is simply the fixed annual interest payment divided by the face value of the bond and does not reflect changes in market conditions. The discount rate and current yield are also used in bond markets, but they are not as widely used or as comprehensive as the yield to maturity.

Question 13

The present value of $900 to be received in three years, with an annual interest rate of 10 percent, compounded annually, is equal to $__________.

Accepted Answer

Using the formula for present value of a future lump sum:

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods.

Plugging in the numbers, we get:

PV = 900 / (1 + 0.1)^3 
PV = 900 / 1.331 
PV = 675.98

Rounding to the nearest dollar, the answer is $676. Therefore, the best answer choice is B.

Question 14

The total amount of interest collected after two years from a $6,000 loan with an annual interest rate of 6 percent compounded annually is equal to $__________.

Accepted Answer

To calculate the total amount of interest collected after two years, we need to use the compound interest formula:

A = P(1 + r/n)^(nt)

Where:
A = final amount
P = principal (initial amount)
r = annual interest rate (as a decimal)
n = number of times interest is compounded per year
t = time in years

In this case, we have:
P = $6,000
r = 0.06 (6% annual interest rate)
n = 1 (compounded annually)
t = 2 (two years)

Plugging these values into the formula, we get:

A = 6,000(1 + 0.06/1)^(1*2)
A = 6,000(1.06)^2
A = $6,741.60

So the total amount of interest collected after two years is $6,741.60 - $6,000 = $741.60.
Therefore, the correct choice is B.

Question 15

The coupon rate is equal to the

Accepted Answer

The coupon rate is the interest rate printed on the face of the bond, which is paid out periodically to the bondholder.

Question 16

If an individual received a total of $400 in simple interest payments on a $1,000 loan over four years, the annual simple interest rate was

Accepted Answer

The answer of If an individual received a total of...

Question 17

The total amount of interest collected after two years from a $6,000 loan with a simple annual interest rate of 6 percent is equal to

Accepted Answer

To calculate the total amount of interest collected after two years, we need to use the formula:

Interest= Principal x Rate x Time

Where Principal is the amount of the loan, Rate is the interest rate, and Time is the length of time the loan is taken out for.

In this case, the principal is $6,000, the rate is 6%, and the time is 2 years.

So:

Interest = $6,000 x 0.06 x 2
Interest = $720

Therefore, the correct answer is B.

Question 18

Suppose an individual pays $4,000 for a $5,000 face-value, coupon-bearing bond that pays $400 per year in interest and will be held until it matures in ten years. The coupon rate on this bond is

Accepted Answer

The coupon rate on a bond is calculated by dividing the annual interest payment by the face value of the bond. So, in this case, the coupon rate is ($400/$5,000) = 0.08, or 8%. Therefore, the best choice is B.

Question 19

Pat Bosky just paid $843 to repay the principal and interest for a six-month, $800 loan. Pat paid a simple annual interest rate of __________ percent.

Accepted Answer

To find the annual interest rate, we need to use the simple interest formula:

I = Prt

Where I is the interest paid, P is the principal (initial loan amount), r is the annual interest rate (as a decimal), and t is the time period in years.

We know that Pat borrowed $800 for six months, or 0.5 years. We also know that she repaid a total of $843.

To find the interest paid, we can subtract the principal from the total amount paid:

I = $843 - $800 = $43

Now we can plug in the values we have into the formula and solve for the annual interest rate:

$43 = $800 * r * 0.5

r = $43 / ($800 * 0.5) = 0.1075 or 10.75%

Rounding to the nearest tenth, we get 10.8%, which corresponds to answer choice C).

Question 20

If an investor pays $1,025 for a bond with a face value of $1,000 and annual payments, it follows that

Accepted Answer

The coupon rate is fixed and determined by the bond's face value and the annual payments. Since the investor pays more than the face value ($1,025 > $1,000), the yield (interest/investment) they receive based on their investment will be lower than the coupon rate, which is based on the face value.

Quiz 4: Interest Rate Measurement and Behavior

A $10,000, one-month loan pays an annualized interest rate of 10 percent. The dollar amount of interest received from the loan is

A $1,000, 7 percent deposit pays interest compounded monthly. After six months, the deposit balance is $__________.

The present value of an asset can be found by __________ the future value.

Which of the following is the correct formula for calculating simple interest?

Luther Schwarz currently has a balance of $838.55 in his savings account. __________ years ago, Luther deposited $500 in his savings account, which pays an annual interest rate of 9 percent, compounded annually.

A 100-year, $1,000 loan that pays a 6 percent simple annual interest rate pays a total amount of interest of

The dollar amount of interest is largest for a four-year loan if the interest is compounded

Buddy Bolly just received his annual bank statement. One year ago, Buddy deposited $10,000 in a savings account. Today, his balance is $10,509.45. Buddy's savings account interest is compounded quarterly. Buddy received an annualized interest rate of __________ percent.

An individual pays $4,000 for a $5,000 face value, coupon-bearing bond that pays $400 per year and will be held until it matures in ten years. The current yield on this bond is

The total amount of cash inflows a lender would receive on a $600 two-year loan with a simple annual interest rate of 8 percent is equal to

Paul Oldy just purchased a $2,000 face value bond with. The bond pays $45 in interest semiannually. Paul could sell the bond today for $2,050. The current yield on this bond is __________ percent.

The most widely used measure of interest rates in bond markets is the

The present value of $900 to be received in three years, with an annual interest rate of 10 percent, compounded annually, is equal to $__________.

The total amount of interest collected after two years from a $6,000 loan with an annual interest rate of 6 percent compounded annually is equal to $__________.

The coupon rate is equal to the

If an individual received a total of $400 in simple interest payments on a $1,000 loan over four years, the annual simple interest rate was

The total amount of interest collected after two years from a $6,000 loan with a simple annual interest rate of 6 percent is equal to

Suppose an individual pays $4,000 for a $5,000 face-value, coupon-bearing bond that pays $400 per year in interest and will be held until it matures in ten years. The coupon rate on this bond is

Pat Bosky just paid $843 to repay the principal and interest for a six-month, $800 loan. Pat paid a simple annual interest rate of __________ percent.

If an investor pays $1,025 for a bond with a face value of $1,000 and annual payments, it follows that