26 May Question 1. If APR = 10%, what is the EAR (effective annual rate) for quarterly compoun
Question
a. 10.00%
b. 10.38%
c. 12.36%
d. 13.36%
e. 15.52%
2. If the current one year CD rate is 3% and the best estimate of one year CD which will be available one year
from today is 5%, what is the current two year CD rate with 1% liquidity premium?
a. 4.0%
b. 4.5%
c. 5.0%
d. 5.5%
e. 6.0%
3. Which of the following statements is CORRECT, assuming positive interest rates and holding other things
constant?
a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary
b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise
c. A bank loan’s nominal interest rate will always be equal to or greater than its effective annual rate.
d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater
e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B
annuity.
similar 20-year mortgage.
than 10%.
pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on
deposit.
4. You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could
earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the
annuity?
a. $1,412.84
b. $1,487.20
c. $1,565.48
d. $1,643.75
e. $1,725.94
5. Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at
the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when
she ceases to withdraw funds from the account. For how many years can she make the $45,000
withdrawals and still have $50,000 left in the end?
a. 15.05
b. 16.36
c. 17.22
d. 18.08
e. 18.99
6. How much do you need to save each year from two years from today and onward so that you can have
$1,000 six years from today at 10% interest rate?
a. $150
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