1. Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)
The outstanding balance declines at a slower rate in the later years of the loan’s life.
The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years.
Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.
Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.
2. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate.
If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
3. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?
$205.83
$216.67
$228.07
$240.08
$252.08