Answers26-27 Ignite Technical Math-Financial Math - MA2007Interest Rates

Interest Rates Answers

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Jessica’s bank is offering her a loan with a stated rate of 4.90% interest. If the interest is compounded every two months, what will Jessica really pay for interest?

A
4.90%
B
5.00%
C
5.01%
D
4.96%
2
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When dealing with a loan, who benefits from compounding interest more frequently, and why?

A
The lender benefits, because the interest compounded increases further interest calculations.
B
The lender benefits, because more compounds means that the borrower must pay more frequently.
C
The borrower benefits, because the interest gained can be used to pay off the loan.
D
The borrower benefits, because each increment of interest will be smaller.
3

Melanie is looking for a loan. She is willing to pay no more than an effective rate of 9.955% annually. Which, if any, of the following loans meet Melanie’s criteria? Loan A: 9.265% nominal rate, compounded weeklyLoan B: 9.442% nominal rate, compounded monthlyLoan C: 9.719% nominal rate, compounded quarterly

A
B only
B
A and C
C
A and B
D
None of these fit Melanie’s criteria.
4

RJ has two loans. Loan H has a nominal rate of 5.68%, compounded daily. Loan I has a nominal rate of 6.33%, compounded monthly. Which loan's effective rate had the greater increase, relative to its nominal rate, and how much greater is its increase than that of the other loan?

A
Loan I’s increase was 0.03 percentage points greater than Loan H’s.
B
Loan I’s increase was 0.68 percentage points greater than Loan H’s.
C
Loan H’s increase was 0.16 percentage points greater than Loan I’s.
D
Loan H’s increase was 0.49 percentage points greater than Loan I’s.
5

Say you are considering two loans. Loan F has a nominal interest rate of 5.66%, compounded monthly. Loan G has a rate of 6.02%, compounded semiannually. Which loan will give the lower effective interest rate, and how much lower will it be?

A
Loan G’s effective rate will be 0.091 percentage points lower than Loan F’s.
B
Loan G’s effective rate will be 0.058 percentage points lower than Loan F’s.
C
Loan F’s effective rate will be 0.302 percentage points lower than Loan G’s.
D
Loan F’s effective rate will be 0.149 percentage points lower than Loan G’s.
6

When calculating a loan’s effective rate, if the interest compounds every two months, what value of n do you plug into your equation?

A
2
B
0.167
C
6
D
60
7

Why do interest rates on loans tend to be lower in a weak economy than in a strong one?

A
A weak economy tends to have low inflation, so interest rates drop to match.
B
Borrowers in a weak economy are less likely to default on their loans, so interest rates are correspondingly low.
C
In a weak economy there is less demand for credit, so the price drops.
D
The strength or weakness of an economy is determined by interest rates; low interest rates actually cause a weak economy.
8

Why is the Federal Funds Rate so influential on other interest rates?

A
The Federal Funds Rate determines how much consumers can borrow per year.
B
The Federal Funds Rate determines how many loans per year a bank can issue.
C
The Federal Funds Rate is only important to heavy investors.
D
The Federal Funds Rate determines at what interest rate banks borrow money.
9

When calculating a loan’s effective interest rate, if the nominal rate is 8.5%, what value of i do you plug into your equation?

A
8.5
B
0.85
C
0.085
D
1.85
10

What effect does inflation have on interest rates, and why?

A
Inflation decreases interest rates, because it causes the principal amount to rise.
B
Inflation decreases interest rates, because borrowers in an inflationary economy cannot afford higher interest rates.
C
Inflation increases interest rates, because the money being lent out is more valuable after inflation.
D
Inflation increases interest rates, because lenders must charge more to gain a benefit on devalued money.

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