Question 1

If you read the fine print on a car loan that claims zero percent,you will probably find that it is for a period much shorter than the full loan period.

Accepted Answer

This is a common practice in the car industry. The zero percent is usually offered for a promotional period, like the first six months, for example, and then a higher interest rate is applied for the rest of the loan term.

Question 2

Suppose you postpone consumption and invest at 6% when inflation is 2%.What is the approximate real rate of your reward for saving?

Accepted Answer

The answer of Suppose you postpone consumption and invest at...

Question 3

Assume you just bought a new car and now have a car loan to repay.The amount of the principal is $22,000,the loan is at 5.9% APR,and the monthly payments are spread out over 6 years.What is the loan payment? Use a calculator to determine your answer.

Accepted Answer

Using a financial calculator or an online loan payment calculator, the loan payment comes out to be $363.57. Therefore, the best choice is B.

Question 4

An abbreviated amortization schedule illustrates that each month more and more of the payment is applied to interest and more and more of the payment is applied to the principal.

Accepted Answer

In an amortization schedule, over time, less of the payment is applied to interest and more of the payment is applied to the principal.

Question 5

Suppose that over the life of the loan,the total interest expense for a monthly loan is $7,000,while the total interest payment for an annual loan is $8,000.Which of the below statements is FALSE?

Accepted Answer

This statement is false. The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan may be lower. This is because more frequent payments mean the principal is reduced at a faster rate, resulting in less interest being charged overall. Therefore, statement D is false.

Question 6

The real rate is 1.25% and inflation is 5.25%.What is the approximate nominal rate?

Accepted Answer

The nominal interest rate can be approximated by adding the real interest rate to the inflation rate. Therefore, 1.25% (real rate) + 5.25% (inflation) = 6.50% (nominal rate).

Question 7

Suppose you postpone consumption so that by investing at 5% you will have an extra $500 to spend in one year.Suppose that inflation is 2% during this time.What is the approximate real increase in your purchasing power?

Accepted Answer

To calculate the real increase in purchasing power, we need to take into account inflation.

First, let's calculate how much we would have in one year if we invest at 5%:

$500 / 0.05 = $10,000

So, we would have $10,000 in one year.

Now, let's adjust this amount for inflation:

$10,000 * (1 - 0.02) = $9,800

This is the amount in today's dollars, adjusted for inflation.

So, the real increase in purchasing power is:

$9,800 - $9,500 = $300

Therefore, the best choice is C.

Question 8

Assume that you are willing to postpone consumption of $1,000 today and buy a certificate of deposit (CD)at your local bank with the $1,000.Holding the CD for one year provides you with an 8% reward for saving or postponing consumption.This reward for postponing consumption implies that at the end of the year you will have how much more money for spending?

Accepted Answer

The reward for postponing consumption is calculated as the interest earned on the initial amount. With an 8% interest rate on $1,000, the interest earned in one year would be $1,000 * 0.08 = $80. Therefore, at the end of the year, you will have $80 more for spending.

Question 9

You just bought a car and took out a loan for $30,000 and are scheduled to make monthly payments for 6 years at an annual rate of 3.9% APR.Suppose you add $132.01 each month to the contracted monthly car payment.This extra amount is applied to the principal.How long will it take you to pay off your loan of $30,000? Use a calculator to determine your answer.

Accepted Answer

To determine the time it will take to pay off the loan with the additional payment, you can use a loan calculator or a financial formula. By adding $132.01 to the monthly payment, you're paying more towards the principal each month, which reduces the loan term. Given the loan amount, interest rate, and additional payment, calculating or using an online tool shows it will take just over 54 months to pay off the loan.

Question 10

Most consumer loans payments are monthly.

Accepted Answer

Most consumer loans, such as car loans, personal loans, and mortgages, require monthly payments.

Question 11

Angel is seeking to expand her rare stamp collection.Each year,rare stamps increase in price at a three percent rate.She believes that if she invests her money for one year,she should be able to buy 16 stamps for what 15 stamps would cost today.What is her real interest rate (or reward for waiting)?

Accepted Answer

Angel's real interest rate can be calculated by finding the rate at which the purchasing power of her investment increases. If she can buy 16 stamps for the price of 15 stamps today, her money's purchasing power increases by $\frac{16}{15} = 1.0667$ or 6.67%. This means she gets 6.67% more stamps for her money after one year, indicating her real interest rate is about 6.67%.

Question 12

Which of the statements below is FALSE?

Accepted Answer

The statement that "The prices of goods and services tend to decrease over time because of inflation" is false. Inflation typically leads to an increase in prices over time, not a decrease.

Question 13

Consider a $20,000 car loan over five years at 8% APR.Assume an option where the car loan offers 0% financing for the first two years of the loan or 8% financing over five years.What are the payment choices to ensure that no interest on the loan is paid? Does this imply that money is "free"? Explain.

Accepted Answer

The answer of Consider a $20,000 car loan over five...

Question 14

You just entered into a $150,000 30-year home mortgage at an annual interest rate of 4.25% making monthly payments of $737.91.Suppose you add an additional payment of $295.97 each month to the $737.91 house payment making your total monthly payments equal to $1,033.88.This extra amount is applied against the principal of the original loan.How long will it take you to pay off your loan of $150,000? Use a calculator to determine your answer.

Accepted Answer

By adding an additional payment of $295.97 to the monthly payment of $737.91, the new total monthly payment becomes $1,033.88. Using a loan repayment calculator, it will take approximately 206 months or 17 years and 2 months to pay off the loan of $150,000 at an annual interest rate of 4.25%. Opting to make additional payments will shorten the life of the loan, and the borrower can expect to pay it off much faster.

Question 15

Becky is seeking to expand her stamp collection.Each year,stamps increase in price at a seven percent rate.She believes that if she invests her money for one year,she should be able to buy 24 stamps for what 23 stamps would cost today.What is her real interest rate or reward for waiting?

Accepted Answer

Let x be the current price of one stamp. According to the problem, if Becky waits for one year, she will be able to buy 24 stamps for the price of 23 stamps today. This can be represented by the equation:

24x = 23(1.07)x

Simplifying and solving for x, we get:

x = 1.07x/24
x = 0.0435

Therefore, the real interest rate or reward for waiting is:

(0.0435 - 0.01) / 0.01 = 3.35%

However, the question asks for the nominal interest rate, which is simply the annual increase in stamp prices, or 7%. So the best choice is:

Answer: A) 4.35%

Question 16

Assume you just bought a new boat and now have a boat loan to repay.The amount of the principal is $68,000,the loan is at 6.75% APR,and the monthly payments are spread out over 7 years.What is the loan payment? Use a calculator to determine your answer.

Accepted Answer

The answer of Assume you just bought a new boat...

Question 17

Suppose that over the life of the loan,the total interest expense for a monthly loan is $17,000,while the total interest payment for an annual loan is $19,000.Which of the below statements is FALSE?

Accepted Answer

Reducing principal at a slower pace increases the overall interest paid on a loan, not reduces it.

Question 18

Nominal interest rates are the sum of two major components.These components are ________.

Accepted Answer

Nominal interest rates are composed of two major components: the real interest rate, which represents the return investors demand for delaying consumption or investing for a certain period of time, and expected inflation, which represents the expected rate of price increases over that period. Therefore, A (the real interest rate and expected inflation) is the correct answer. B, C, and D are incorrect because they do not include the real interest rate and expected inflation as two components of nominal interest rates.

Question 19

Consider a $30,000 car loan over six years at 7% APR.Assume an option where the car loan offers 0% financing for the first two years of the loan or 7% financing over six years.What are the payment choices to ensure that no interest on the loan is paid?

Accepted Answer

The answer of Consider a $30,000 car loan over six...

Question 20

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD)at your local bank.Your reward for postponing consumption implies that at the end of the year ________.

Accepted Answer

By postponing consumption and investing in a CD, you earn interest on your deposit. This interest accrues over time and increases the amount of money you have at the end of the year. Therefore, you will be able to buy more goods or services with the higher amount of money you have.

Quiz 5: Interest Rates