Exam 5: Interest Rates

Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000. He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan?

Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it?

How are interest and return of principal handled in an amortizing loan payment?

The effective annual rate (EAR)for a savings account with a stated APR of 5% compounded daily is closest to ________.

A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten years' time. How much greater is the present value (PV)of this payment if the interest rate is 9% rather than 8%?

Term: 1 year 2 years 3 years 5 years 10 years 20 years Rate: 5.00% 5.20% 5.40% 5.50% 5.76% 5.9% Given the above term structure of interest rates, which of the following is most likely in the future? Option I. Interest rates will fall. Option II. Economic growth will slow. Option III. Long-term rates will rise relative to short term rates.

Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?

Elinore is asked to invest $5100 in a friend's business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case?

Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?

The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV)of cash flows from an investment that yields $6000 at the end of each year for the next four years?

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

You are considering purchasing a new automobile with the upfront cost of $26,000 or leasing it from the dealer for a period of 48 months. The dealer offers you 2.80% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $26,000 through the dealer, your monthly payments will be closest to ________.

Which of the following best describes the annual percentage rate?

Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month)with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________.

A 12% APR with bi-monthly compounding is equivalent to an EAR of ________.

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firm's borrowings is closest to ________.

The real interest rate is the rate of growth of one's purchasing power due to money invested.

Which of the following statements is FALSE?

In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009?

Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000. If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense?