Question

5. Which of the following bank accounts has the highest effective annual return (EAR)? An account that pays 8% nominal interest with monthly compounding An account that pays 8% nominal interest with annual compounding An account that pays 7% nominal interest with daily (365-day) compounding An account that pays 7% nominal interest with monthly compounding a. b. C. d. 6. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a fixed nominal interest rate of 10% is CORRECT? The monthly payments will increase over time. A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment. The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10% a. b. c. d. 7. what is the present value of the following cash flow stream at a rate of 6.25%? Years 0 4 $225 CFs S0 $75 $0 $300 a. $411.57 b. $433.23 c. $456.03 d. $505.30 8" The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4%, and there is a positive maturity risk premium that increases with years to maturity. Given these conditions, which of the following statements is CORRECT? The yield on a 2-year T-bond must exceed that on a 5-year T-bond b. a. The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond. The yield on a 7-year Treasury bond must exceed that of a 5-year corporate bond. None of the above are true. c. d. 9. Which of the following statements is correct regarding bonds, all else equal? a. The longer the maturity, the higher the inflation premium (IP) b. The longer the maturity, the lower the real risk-free rate (r*) c. The yield-to-maturity (YTM) is higher for a US corporate bond than for a US government of similar maturity d. None of these statements is correct.

Answer 1

Answer to Q#5 (First question in the list Option-(a): An account that pays 8% nominal interest with monthly compounding Reason: When compounded monthly, Effective Annual Rate (EAR) (1+Nominal interest rate / 12)2]-1 When compounded annually, Effective Annual Rate (EAR) Nominal interest rate When compounded daily, Effective Annual Rate (EAR) (1 +Nominal interest rate /365)565]-1 case-(b) 8% Case-(c 796 365 7.25% Case-(d) 796 12 7.23% Case-(a 8% 12 8.30% Nominal interest rate Number of frequencies in a year Effective Annual Rate (EAR) 8.00% NOTE For Case-(a), EAR2 (1 + 8%/12)12-1-8.30%; Case-(b): EARz (1 + 8%/1)1-1-800%; For Case-(c). EARs (1 + 7%/365)365-1-7.25%; Case-(d), EARs (1 + 7%/12) 12-1-7.23%