Borrowing Money Answers

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.

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.

Anna’s bank gives her a loan with a stated interest rate of 10.22%. How much greater will Anna’s effective interest rate be if the interest is compounded daily, rather than compounded monthly?a.0.5389 percentage pointsb.0.1373 percentage pointsc.0.4926 percentage pointsd.0.0463 percentage points

Craig is considering four loans. Loan L has a nominal rate of 8.254%, compounded daily. Loan M has a nominal rate of 8.474%, compounded weekly. Loan N has a nominal rate of 8.533%, compounded monthly. Loan O has a nominal rate of 8.604%, compounded yearly. Which of these loans will offer Craig the best effective interest rate?a.loan Lb.loan Mc.loan Nd.loan O

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%

Joel takes out a loan with a stated rate of 11.85% interest. If the interest is calculated weekly, how much greater is Joel’s effective rate than his stated rate?a.0.72 percentage pointsb.0.52 percentage pointsc.0.70 percentage pointsd.0.67 percentage points

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.2b.0.167c.6d.60

Thomas has a loan with a nominal interest rate of 6.4624% and an effective interest rate of 6.4715%. Which of the following must be true?I. The loan has a duration greater than one year.II. The interest on Thomas’s loan is compounded more than once yearly.III. The economy was strong when Thomas took out the loan.a.I and IIb.II onlyc.I and IIId.III only

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.

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.

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 quarterlya.B onlyb.A and Cc.A and Bd.None of these fit Melanie’s criteria.

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.2b.0.167c.6d.60

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.8.5b.0.85c.0.085d.1.85

When calculating the effective rate of a loan, which statement or statements must be true if n is greater than 1?I. The length of the loan is greater than a single year.II. The effective rate will exceed the nominal rate.III. The interest will be compounded monthly.a.II onlyb.II and IIIc.I and IIId.I, II, and III

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.

Which factor or factors listed below are internal influences on a loan’s interest rate?I. current and prospective inflationII. collateral offered by the borrowerIII. the strength of the economya.I onlyb.I and IIIc.II onlyd.II and III

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.

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.

Which factor or factors listed below are internal influences on a loan’s interest rate?I. current and prospective inflationII. collateral offered by the borrowerIII. the strength of the economya.I onlyb.I and IIIc.II onlyd.II and III

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.8.5b.0.85c.0.085d.1.85

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.

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 quarterlya.B onlyb.A and Cc.A and Bd.None of these fit Melanie’s criteria.

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.