Which of the following statements is most correct?
A) The first payment under a 3-year,annual payment,amortized loan for $1,000 will include a smaller percentage (or fraction)of interest if the interest rate is 5 percent than if it is 10 percent.
B) If you are lending money,then,based on effective interest rates,you should prefer to lend at a 10 percent simple,or quoted,rate but with semiannual payments,rather than at a 10.1 percent simple rate with annual payments.However,as a borrower you should prefer the annual payment loan.
C) The value of a perpetuity (say for $100 per year)will approach infinity as the interest rate used to evaluate the perpetuity approaches zero.
D) Statements a,b,and c are all true.
E) Only statements b and c are true.

Question

Quizplus · Accepted Answer

- A is true because with a lower interest rate, a larger portion of the payment goes towards the principal rather than interest. - B is true because the effective interest rate of a 10% simple rate with semiannual payments is higher than a 10.1% rate with annual payments, making it preferable for a lender but not for a borrower. - C is true because as the discount rate approaches zero, the present value of the perpetuity (which is calculated as the annual payment divided by the discount rate) approaches infinity.

Which of the Following Statements Is Most Correct