# Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT

written by - Comments off

Question 1

1. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Answer

 The monthly payments will decline over time. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. The amount representing interest in the first payment would beæhigheræif the nominal interest rate were 7% rather than 10%. Exactly 10% of the first monthly payment represents interest.

2 points

### Question 2

1. Which of the following statements is CORRECT?

Answer

 A time line is not meaningful unless all cash flows occur annually. Time lines are useful for visualizing complex problems prior to doing actual calculations. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

2 points

### Question 3

1. Which of the following statements is CORRECT?

Answer

 The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. The cash flows for an annuity due must all occur at the ends of the periods. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as aævariableannuity.

2 points

### Question 4

1. You plan to invest some money in a bank account.æ Which of the following banks provides you with the highest effective rate of interest?

Answer

 Bank 1; 6.1% with annual compounding. Bank 2; 6.0% with monthly compounding. Bank 3; 6.0% with annual compounding. Bank 4; 6.0% with quarterly compounding. Bank 5; 6.0% with daily (365-day) compounding.

2 points

### Question 5

1. You are considering two equally risky annuities, each of which pays \$5,000 per year for 10 years.æ Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.æ Which of the following statements is CORRECT?

Answer

 The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.