1. Present values and interest rates are inversely related. 2. The effective annual rate will always...
1. Present values and interest rates are inversely related.
2. The effective annual rate will always be less than the quoted rate if the interest rate is compounded more than once per year.
3. A series of equal dollar payments made for a specified time period is called.
Homework Answers
1. This statement id TRUE.
Present values and interest rates are inversely related. As interest rates decrease, present value increases and as interest rates increase, present value decreases. This is because a higher interest rate means we have to set lesser amount today to earn a specific amount in future and vice versa.
2. This statement is FALSE.
Effective annual rate is always be more than the quoted interest rate if the interest rate is compounded more than once per year.Effective interest rate is the rate actually earned on the investment due to compounding of interest more than once in a year. As the number of compounding periods in a year increases, effective annual rate will also increase, because effective annual rate includes the compounding amount also.
3. A series of equal dollar payments made for a specified time period is called Annuity.
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