Which of the following statements is correct?
A) A 15-year mortgage will have larger monthly payments than a 30-year mortgage.
B) If an account earns 3% per year compounded annually, then it also has an effective annual rate (EAR) of 3%.
C) The present value of a $500 perpetuity is greater if the interest rate is higher.
D) Statements a, b and c are correct.
E) Only statements a and b are correct.

Question

Quizplus · Accepted Answer

Statement A is true because a 15-year mortgage has a shorter term period, which means that the borrower must pay off the loan faster. This will result in larger monthly payments.

Statement B is false because an account that earns 3% per year compounded annually will have an effective annual rate greater than 3%, due to compounding.

Statement C is false because the present value of a perpetuity is inversely proportional to the interest rate. Therefore, if the interest rate increases, the present value of the perpetuity decreases.

Which of the Following Statements Is Correct