Topic Test Answers

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.

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.

Henry wants to avoid interest capitalization on his $7,800 unsubsidized Stafford loan. Henry will graduate in four years, and the loan has a duration of ten years. The loan has an interest rate of 5.6%, compounded monthly. How much must Henry pay every month to avoid interest capitalization?a.$14.56b.$43.68c.$36.40d.$31.20

In a secured loan, collateral is _____.a.valuable property that the borrower promises to give the lender in the event of default on the loanb.an agreement made in civil court agreeing that the borrower may be arrested in the event of default on the loanc.an agreement signed by a co-borrower promising to pay the loan in the event the primary borrower defaults on the loand.and insurance policy taken out by the lender and paid for by the borrower to cover the lender from loss in the event of default

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.