Question

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 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.c. If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.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.

Answer 1

Answer:

c. If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%

CORRECT

as at least is recive 7% of the investment. If payment are made in shorter period (semiannually, quarterly, etc)

Then the effective rate will be higher, not lower.

Explanation:

a. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%

FALSE the effective rate will be higher as there is compounding effect.

b. The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due

FALSE the annuity-due is discounted for one period less, as the payment are made at the beginning of the period therefore; his V is greater.

d. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different

FALSE if it mades annual payments they will be equal

e. The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

FALSE the interest will decrease over time as there is a portion of principal which is being paid each installment