Which of the following statements is CORRECT?
A) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
B) The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
C) If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
D) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
E) The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Question

Quizplus · Accepted Answer

The present value of an annuity due is always greater than the present value of an ordinary annuity because payments are made at the beginning of each period rather than at the end. Therefore, option B is correct. Option A is incorrect because the effective rate will actually be slightly higher than 6% due to compounding. Option C is incorrect because the effective rate can be greater than the nominal rate if there is more than one compounding period per year. Option D is incorrect because if there is only one compounding period per year, then the effective and nominal rates will be the same. Option E is incorrect because the proportion of the payment that goes toward interest on a fully amortized loan actually decreases over time.

Which of the Following Statements Is CORRECT