FINS1613 Study Guide - Quiz Guide: Nominal Interest Rate, Real Interest Rate, Opportunity Cost
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1.) Suppose Oppenheimer Bank is offering a 30-year mortgage with an EAR of 6.800%. If you plan to borrow $150,000, what will be your monthly payment? (Note: Be careful not to round any intermediate steps less than six decimal places.) Your monthly payment will be $______
2.) You are looking to buy a car and you have been offered a loan with an APR of 6%, compounded monthly.
a. What is the true monthly rate of interest? 0.5%
b. What is the EAR?
3.) You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000.The mortgage is currently exactly 18½ years old, and you have just made a payment. If the interest rate on the mortgage is 5.25% (APR), how much cash will you have from the sale once you pay off the mortgage? (Note: Be careful not to round any intermediate steps less than six decimal places.)
Cash that remains after payoff of mortgage is __________
4.) If the rate of inflation is 4.5%, what nominal interest rate is necessary for you to earn a 2.3% real interest rate on your investment? (Note: Be careful not to round any intermediate steps less than six decimal places.)
The nominal interest rate is ___%
5.) Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term |
1 year |
2 years |
3 years |
5 years |
10 years |
20 years |
Rate (EAR%) |
5.00% |
4.80% |
4.60% |
4.50% |
4.25% |
4.15% |
What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
A. inverted; higher
B. inverted; lower
C. normal; higher
D. normal; lower
Automobiles are often leased, and several terms are unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $38,600. This is the base capitalized cost. Other costs added to the capitalized cost price include the acquisition (bank) fee, insurance, or extended warranty. Assume these costs are $1,150. Capitalization cost reductions include any down payment, credit for trade-in, or dealer rebate. Assume you make a down payment of $2,500, and there is no trade-in or rebate. If you drive 12,000 miles per year, the lease-end residual value for this car will be $26,400 after three years. The lease or "money" factor, which is the interest rate on the loan, is the APR of the loan divided by 2,400. The lease factor the dealer quotes you is .00261. The monthly lease payment consists of three parts: a depreciation fee, a finance fee, and sales tax. The depreciation fee is the net capitalization cost minus the residual value, divided by the term of the lease. The net capitalization cost is the cost of the car minus any cost reductions plus any additional costs. The finance fee is the net capitalization cost plus the residual, times the money factor, and the monthly sales tax is the depreciation payment plus the finance fee, times the tax rate. |
What APR is the dealer quoting you? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
APR | % |
What is your monthly lease payment for a 36-month lease if the sales tax is 7 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Lease payment | $ |
1. On the day you entered college, you borrowed $30,000 from your local bank. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much total interest will you pay on this loan assuming you paid as agreed? (Hint: This is simple interest, not an amortized loan)
$7,267 |
$7,400 |
$7,125 |
$1,500 |
$1,425 |
2. Mr. Miser loans money at an annual percentage rate of 18 percent. Interest is compounded daily. What is the effective rate Mr. Miser is charging on his loans?
3. You just acquired a 30-year mortgage in the amount of $179,500 at 4.75 percent interest, compounded monthly. Payments will be equal over the life of the loan with the first payment due one month after the date of the loan. How much of the first payment will be interest?
4.The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $24,500,000 be paid to the president upon the completion of her first 6 years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 5 percent on these funds. How much must the company set aside each year for this purpose?