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Use the information for the question(s) below. Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV. -The amount of your original loan is closest to:


A) $14,808
B) $22,212
C) $32,000
D) $37,020

E) A) and B)
F) A) and C)

Correct Answer

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Use the information for the question(s) below. You are purchasing a new home and need to borrow $250,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay 2 points, they can offer you a lower rate of 6.0% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points you will need to borrow an additional $5000 to cover points you are paying the lender. -Assuming you don't pay the points and borrow from the mortgage lender at 6.25%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to:


A) $694
B) $708
C) $1540
D) $1600

E) A) and B)
F) A) and C)

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following statements is FALSE?


A) The relationship between the investment term and the interest rate is called the term structure of interest rates.
B) Real interest rates indicate the rate at which your money will grow if invested for a certain period.
C) The yield curve is a potential leading indicator of future economic growth.
D) The shape of the yield curve will be strongly influenced by interest rate expectations.

E) None of the above
F) B) and C)

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Which of the following statements is FALSE?


A) Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.
B) The effective annual rate indicates the amount of interest that will be earned at the end of one year.
C) The annual percentage rate indicates the amount of simple interest earned in one year.
D) The annual percentage rate indicates the amount of interest including the effect of compounding.

E) None of the above
F) A) and B)

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -The total amount of interest that Dagny will pay during the first month of her mortgage is closest to:


A) $1,110
B) $1,785
C) $1,800
D) $2,245

E) B) and D)
F) A) and D)

Correct Answer

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Use the table for the question(s) below. Suppose you have the following Loans/Investments Use the table for the question(s) below. Suppose you have the following Loans/Investments -If your income tax rate is 30%, then the after-tax EAR for your home equity loan is closest to: A) 6.0% B) 5.9% C) 8.6% D) 5.8% -If your income tax rate is 30%, then the after-tax EAR for your home equity loan is closest to:


A) 6.0%
B) 5.9%
C) 8.6%
D) 5.8%

E) A) and B)
F) C) and D)

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -If the current inflation rate is 4.2% and you are earning a real rate of return on an investment of 3.8%, then the nominal rate on this investment is closest to:


A) 3.8%
B) 4.2%
C) 8.0%
D) 8.2%

E) A) and B)
F) C) and D)

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following statements is FALSE?


A) The plot of the relationship between the investment risk and the interest rate is call the yield curve.
B) Each of the last six recessions in the United States was preceded by a period with an inverted yield curve.
C) The nominal interest rate does not represent the increase in purchasing power that will result from investing
D) A risk-free cash flow received in two years should be discounted at the two-year interest rate.

E) B) and C)
F) A) and C)

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following statements is FALSE?


A) An inverted yield curve generally signals an expected decline in future interest rates.
B) An inverted yield curve is often interpreted as a positive forecast for economic growth.
C) All the formulas for computing present values of annuities and perpetuities are based upon discounting all of the cash flows at the same rate.
D) The rate of growth of your purchasing power is determined by the real interest rate.

E) B) and C)
F) None of the above

Correct Answer

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Use the following information to answer the question(s) below: Suppose the term structure of risk-free interest rates is given as: Term 1 year 2 years 3 years 5 years 10 years Rate 2.25% 2.80% 3.20% 4.10% 6.30% -The present value of an investment that pays $2,000 in one year and $3,000 in three years for certain is closest to:


A) $4,707
B) $4,685
C) $4,729
D) $5,000

E) A) and D)
F) None of the above

Correct Answer

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Use the table for the question(s) below. Suppose you have the following Loans/Investments Use the table for the question(s) below. Suppose you have the following Loans/Investments -Which of the following statements is FALSE? A) The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term. -Which of the following statements is FALSE?


A) The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.
B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk.
C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment.
D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

E) B) and D)
F) B) and C)

Correct Answer

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Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: -What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? A) Inverted; Higher B) Normal; Higher C) Inverted; Lower D) Normal; Lower -What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?


A) Inverted; Higher
B) Normal; Higher
C) Inverted; Lower
D) Normal; Lower

E) B) and D)
F) All of the above

Correct Answer

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Use the table for the question(s)below. Suppose the term structure of interest rates is shown below: Use the table for the question(s)below. Suppose the term structure of interest rates is shown below: -What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one, three, and five years? -What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one, three, and five years?

Correct Answer

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NPV = -2500 + 1000/(...

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -If the current inflation rate is 4% and you have an investment opportunity that pays 10%, then the real rate of interest on your investment is closest to:


A) 10.0%
B) 14.0%
C) 6.0%
D) 5.8%

E) A) and B)
F) B) and D)

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -The total amount of interest that Dagny will pay during the first three months of her mortgage is closest to:


A) $1,345
B) $5,380
C) $5,395
D) $6,740

E) B) and C)
F) None of the above

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following statements is FALSE?


A) The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan.
B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate.
C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates.
D) Fundamentally, interest rates are determined by the Federal Reserve.

E) A) and B)
F) A) and C)

Correct Answer

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Use the information for the question(s) below. Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV. -Hugh Akston took out a 30-year mortgage with an EAR of 5.9%. If Hugh borrowed $300,000 to buy his home, then his monthly payment will be closest to:


A) $835
B) $1,750
C) $1,780
D) $10,240

E) A) and B)
F) A) and C)

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following formulas is INCORRECT?


A) i = Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following formulas is INCORRECT? A) i = - 1 B) 1 + r<sub>r</sub> = C) r<sub>r</sub> ≈ i - r D) r<sub>r</sub><sub> </sub>= - 1
B) 1 + rr = Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following formulas is INCORRECT? A) i = - 1 B) 1 + r<sub>r</sub> = C) r<sub>r</sub> ≈ i - r D) r<sub>r</sub><sub> </sub>=
C) rr ≈ i - r
D) rr = Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Which of the following formulas is INCORRECT? A) i = - 1 B) 1 + r<sub>r</sub> = C) r<sub>r</sub> ≈ i - r D) r<sub>r</sub><sub> </sub>=

E) A) and B)
F) B) and D)

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -Dagny's monthly payments are closest to:


A) $1,110
B) $1,800
C) $2,215
D) $2,245

E) A) and B)
F) A) and C)

Correct Answer

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Use the following information to answer the question(s) below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -If an investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%, then the inflation rate is closest to:


A) 5.70%
B) 6.20%
C) 6.55%
D) 12.25%

E) All of the above
F) A) and B)

Correct Answer

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