Question 1

Which of the following statements would most correctly complete the following sentence? As the interest rate on a loan increases

Accepted Answer

When the interest rate on a loan increases, the payment amount would also increase to compensate for the higher interest cost. This is assuming that all other factors, such as the loan amount and term, remain constant.

Question 2

What is the name of the interest rate banks charge to their most creditworthy customers?

Accepted Answer

The interest rate banks charge to their most creditworthy customers is called the prime rate, making option C the correct answer. Option A, Main rate, is not a commonly used term. Option B, Blue chip rate, is also not a widely used term and typically refers to the stock prices of well-established companies. Option D, Premier rate, is a term used by some financial institutions but is not a widely used industry term.

Question 3

Give five things you can do to obtain the most favorable rates on loans,which in essence will allow you to lower the lender's risk.

Accepted Answer

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Question 4

You have just obtained a personal loan for a new home movie system under the simple interest method.You have borrowed $12,000 for 9 months at an annual rate of 10%.Your marginal tax rate is 28%.What are the total interest charges you would pay if the loan is paid off on time?

Accepted Answer

The total interest is calculated using the formula: Interest = Principal x Rate x Time. Here, Interest = $12,000 x 0.10 x (9/12) = $900.

Question 5

Why is the discount method more costly than the simple interest method on a single-payment loan?

Accepted Answer

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Question 6

Calculate the interest on $6,000 borrowed at an annual rate of 9% under the simple interest loan method for 9 months.

Accepted Answer

The formula for simple interest is:

Simple Interest = (Principal x Rate x Time) / 100

Where,

Principal = $6,000 
Rate = 9% per annum 
Time = 9 months

Firstly, we need to convert the time to years by dividing it by 12:

Time = 9 / 12 = 0.75 years

Now, we can substitute the values in the formula:

Simple Interest = (6,000 x 9 x 0.75) / 100 = $405

Therefore, the interest on $6,000 borrowed at an annual rate of 9% under the simple interest loan method for 9 months is $405. The best choice is (C).

Question 7

Which is better,a fixed-rate loan or a variable-rate loan?

Accepted Answer

The choice between fixed-rate and variable-rate loans depends on individual risk tolerance and market conditions, illustrating the principle that risk and return are correlated.

Question 8

Which of the following statements regarding the risk-return relationship is most accurate?

Accepted Answer

The statement that higher credit scores are associated with lower APRs is the most accurate reflection of the risk-return relationship. This is because lenders view borrowers with higher credit scores as less risky and therefore offer them lower interest rates as a reward for their responsible financial behavior. The other answer choices are not directly related to the risk-return relationship.

Question 9

Your brother,a banker,has just approved a loan for you,an add-on interest loan.You will borrow $2,000 for one year with a 12% annual interest rate.What is your monthly payment?

Accepted Answer

To calculate the monthly payment for an add-on interest loan, we need to first find the total amount to be repaid, which is the sum of the loan amount and the interest for the year.

Total amount = loan amount + (loan amount x interest x loan term)

Total amount = $2,000 + ($2,000 x 0.12 x 1)

Total amount = $2,240

Next, we divide the total amount by the number of monthly payments to get the monthly payment amount.

Monthly payment = total amount / number of payments

Monthly payment = $2,240 / 12

Monthly payment = $186.67

Therefore, the monthly payment is $186.67 (choice B).

Question 10

With a(n)________ installment loan,interest charges are calculated using the original balance,and these charges are then added to the loan.

Accepted Answer

In the add-on method, interest charges are added to the original balance of the loan, and the borrower repays the loan in equal installments. This means that the interest charges are not calculated on a reducing balance, as in the case of other methods like the simple interest method, partial amortization method, and discount method. Hence, the add-on method is the most appropriate choice for this question.

Question 11

The ________ is the true simple interest rate paid over the life of a loan and provides a reasonable approximation for the true cost of borrowing.

Accepted Answer

The Annual Percentage Rate (APR) is the true simple interest rate paid over the life of a loan and provides a reasonable approximation for the true cost of borrowing.

Question 12

A loan that is paid back in a single lump sum payment at the due date of the loan is commonly called a(n)

Accepted Answer

A balloon loan requires the borrower to make a large payment at the end of the loan term, typically the entire principal balance that is due. This is different from an installment loan, where payments are spread out over a period of time until the entire principal and interest balance is paid in full. A fully amortized loan means that the borrower will make equal payments over the life of the loan that will cover both principal and interest, keeping the payments consistent. A secured loan is a loan that is secured by collateral, such as a car or house. Therefore, the best choice is B.

Question 13

Explain why add-on installment loans are more expensive than simple interest loans.

Accepted Answer

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Question 14

Which of the following does not require you to have a good credit rating to issue you a loan?

Accepted Answer

Your family may be willing to issue you a loan without requiring a good credit rating because they have a personal relationship with you and may be more lenient. Savings and loan and commercial banks typically require a good credit rating to issue a loan.

Question 15

What is the type of loan where the entire interest charge is subtracted from the loan principal before you receive the money,and at maturity you repay the entire principal?

Accepted Answer

The loan described is utilizing the discount method, where the interest charge is subtracted from the loan principal upfront, resulting in a lower loan amount being disbursed to the borrower. The borrower then repays the full principal amount at maturity.

Question 16

You just received a loan from your banker to buy seed and plant your alfalfa field.The loan is a discount loan and is for $5,000 for 1 year and the quoted rate was 10%.What is your APR?

Accepted Answer

First, we need to know the interest paid on the loan. With a quoted rate of 10%, the interest is $500 ($5,000 x 10%). 
Next, we need to know the amount received after the discount. The formula for the amount received is: 
Amount Received = Loan Amount - Interest 
Amount Received = $5,000 - $500 
Amount Received = $4,500 
Now we can calculate the APR using the following formula: 
APR = (Interest / Amount Received) x (365 / Days in Loan Term) x 100% 
APR = ($500 / $4,500) x (365 / 360) x 100% 
APR = 0.1111 or 11.11% (rounded to 2 decimal places) 
Therefore, the best answer is B.

Question 17

Gary is taking out a $5,000 loan for 1 year at an APR of 12%.His bank has offered him a loan using the add-on method.Using first the financial calculator method and the add-on method calculate Gary's monthly loan payment.

Accepted Answer

Using the financial calculator method (or the formula for an amortizing loan), the monthly payment can be calculated using the formula for the monthly payment of a loan: $PMT = P \times \frac{r(1+r)^n}{(1+r)^n-1}$, where $P$ is the principal amount ($5,000), $r$ is the monthly interest rate (APR/12, so 0.12/12 = 0.01), and $n$ is the total number of payments (12 for one year). Plugging in the values, we get a monthly payment of approximately $444.24.Using the add-on method, the total interest is calculated first and then added to the principal before dividing by the number of months to find the monthly payment. The total interest using the add-on method is $P \times r = $5,000 \times 0.12 = $600$. Adding this to the principal gives $5,600, which, when divided by 12, gives a monthly payment of approximately $466.67.

Question 18

Of the following possible sources of credit,which typically has the lowest borrowing rates?

Accepted Answer

Credit unions are non-profit financial institutions owned by their members. Since they are not seeking to make a profit, they often offer lower borrowing rates than for-profit institutions like commercial banks or personal finance companies. Savings and loans may also offer lower rates, but credit unions are typically the best choice for low borrowing rates.

Question 19

You are headed to the mountains for some climbing this summer and you need some gear.The local mountaineering shop is offering 6% financing on all purchases before the end of the month.Your savings account is currently paying 5%,and you are in a marginal tax bracket of 28%.Which of the following is true?

Accepted Answer

Since the savings account is paying 5% and the mountaineering shop is offering 6% financing, it is cheaper to use the money from the savings account to make the purchases. Borrowing from the shop would result in paying more in interest. Additionally, since the marginal tax bracket is 28%, any interest earned on the savings account would be subject to that tax, meaning the net return on the savings account would be less than 5%. Therefore, using the savings account to make the purchases is the best option.

Question 20

What strategy should you use to obtain the lowest possible APR on a loan?

Accepted Answer

Strategies to obtain the lowest possible Annual Percentage Rate (APR) on a loan include getting a variable-rate loan (which can offer lower initial rates), keeping the loan term short (reducing the lender's risk), making a large down payment (decreasing the loan amount and the lender's risk), and providing collateral (securing the loan, thus lowering the interest rate). All these actions can influence the lender to offer a lower APR.

Quiz 7: Student and Consumer Loans: The Role of Planned Borrowing