Fundamentals of Engineering Economics

Business

Quiz 3 :

Understanding Money Management

Quiz 3 :

Understanding Money Management

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A loan company offers money at 1.25% per month compounded monthly. (a) What is the nominal interest rate? (b) What is the effective annual interest rate?
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Given information:
• Interest rate per month is 1.25 percent.
a.Nominal interest rate:
Nominal interest rate can be calculated by using the following formula: img …… (1)Substitute the respective values in Equation (1) to calculate the nominal interest rate. img Hence, the nominal interest rate is img percent.
b.Effective interest rate:
Effective interest rate can be calculated by using the following formula: img …… (2)Where,
i = Interest rate
n = Time period
Substitute the respective values in Equation (2) to calculate the effective interest rate. img Hence, the effective interest rate is img percent.

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You borrow $20,000 from a bank to be repaid in monthly installments for three years at 9% interest compounded monthly. What is the portion of interest payment for the 18th payment? (a) $150.00 (b) $88.28 (c) $80.04 (d) $84.17
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Given information:
• Borrowing amount is $20,000.
• Interest rate is 9 percent per year. Hence, monthly interest rate is 0.75 percent.
• Time period is 36 months.
Monthly payment:
Monthly payment can be calculated by using the following formula: img …… (1)Where,
i = Interest rate
n = Time period
Substitute the respective values in Equation (1) to calculate the monthly payment. img img Hence, the monthly payment is img .
Interest payment:
Interest payment for 18 th payment can be calculated by using the following formula: img …… (2)Substitute the respective values in Equation (2) to calculate the monthly payment. img img The interest rate payment of 18 is img . Hence, option (d) is the correct answer.

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A department store has offered you a credit card that charges interest at 1.65% per month compounded monthly. What is the nominal interest (annual percentage) rate for this credit card? What is the effective annual interest rate?
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Answer:

Answer:

Given information:
• Monthly compounded interest rate is 1.65 percent.
a.Nominal interest rate:
Nominal interest rate can be calculated by using the following formula: img …… (1)Substitute the respective values in Equation (1) to calculate the nominal interest rate. img Hence, nominal interest rate is img percent.
b.Effective interest rate:
Effective interest rate can be calculated by using the following formula: img …… (2)Where,
i = Interest rate
n = Time period
Substitute the respective values in Equation (2) to calculate the effective interest rate. img Hence, effective interest rate is img percent.

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You are making semiannual deposits into a fund that pays interest at a rate of 8% compounded continuously. What is the effective semiannual interest rate? (a) 4.000% (b) 4.081% (c) 4.164% (d) 4.175%
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A financial institution is willing to lend you $1,000. However, you must repay $1,080 at the end of one week. (a) What is the nominal interest rate? (b) What is the effective annual interest rate?
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Suppose you purchased a corporate bond with a 10-year maturity, a $1,000 par value, a 9% coupon rate ($45 interest payment every six months), and semiannual interest payments. Five years after the bonds were purchased, the going rate of interest on new bonds fell to 6% (or 6% compounded semiannually). What is the current market value (P) of the bond (five years after the purchase)? (a) P = $890 (b) P = $1,223 (c) P = $1,090 (d) P = $1,128
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Two banks offer the following interest rates on your deposit: Bank A: 8% interest compounded quarterly Bank B: 7.9% interest compounded continuously Which of the following statements is not true? (a) The annual percentage yield (APY) for Bank A is 8.24%. (b) The effective annual interest rate for Bank B is 8.22%. (c) Bank B offers a better deal as your money earns interest continuously. (d) The annual percentage rate (APR) for Bank B is 7.9%.
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A California bank, Berkeley Savings and Loan, advertised the following information: 7.55% APR and effective annual yield 7.842%. No mention is made of the interest period in the advertisement. Can you figure out the compounding scheme used by the bank?
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You obtained a loan of $20,000 to finance your home improvement project. Based on monthly compounding over 24 months, the end-of-the-month equal payment was figured to be $922.90. What is the APR used for this loan?
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You borrowed $100,000, agreeing to pay the balance in 10 equal annual installments at 8% annual interest. Determine the remaining loan balance right after the fifth payment. (a) $74,515 (b) $68,894 (c) $59,503 (d) $49,360
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American Eagle Financial Sources, which makes small loans to college students, offers to lend a student $500. The borrower is required to pay $38 at the end of each week for 16 weeks. Find the interest rate per week. What is the nominal interest rate per year? What is the effective interest rate per year?
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You are purchasing a $16,000 used automobile, which is to be paid for in 36 monthly installments of $517.78. What nominal interest rate are you paying on this financing arrangement?
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A discount interest loan is a loan arrangement where the interest and any other related charges are calculated at the time the loan is closed. Suppose a one-year loan is stated as $10,000 and the interest rate is 12%. Then, the borrower pays $1,200 interest up front, thereby receiving net funds of $8,800 and repaying $10,000 in a year. What is the effective interest rate on this one-year loan?
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Compute the present worth ( P ) for the cash flows with the different periodic interest rates specified. The cash flows occur at the end of each year over six years. (a) P = $2,140 (b) P = $2,154 (c) P = $2,234 (d) P = $2,249 img
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You borrowed $10,000 from a bank at an interest rate of 9%, compounded monthly. This loan will be repaid in 48 equal monthly installments over four years. Immediately after your 25th payment, if you want to pay off the remainder of the loan in a single payment, the amount is close to (a) $5,723 (b) $5,447 (c) $5,239 (d) $5,029
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Calculate the future worth of 15 annual $3,000 deposits in a savings account that earns 9% compounded monthly. Assume that all deposits are made at the beginning of each year. (a) $96,010 (b) $88,083 (c) $90,764 (d) $99,279
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You are making $1,000 monthly deposits into a fund that pays interest at a rate of 6% compounded monthly. What would be the balance at the end of 10 years? (a) $163,879 (b) $158,169 (c) $127,200 (d) $159,423
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A loan of $20,000 is to be financed to assist a person's college education. Based upon monthly compounding for 48 months, the end-of-the-month equal payment is quoted as $520. What nominal interest rate is being charged?
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Consider the following two cash flow transactions. If they are economically equivalent at 10% interest, find the value of C. img (a) C = $ 325 (b) C = $ 282 (c) C = $ 310 (d) C = $ 277
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To finance your car, you have decided to take a car loan in the amount of $15,000 from your credit union. You will pay off this loan over 60 months. If the required monthly payment is $322.41, what is the effective annual interest rate on this car loan?
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