ULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) W hich of the following statements is FALSE? 1) _______ A) B ecause interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. B) T he annual percentage rate indicates the amount of simple interest earned in one year. C) T he effective annual rate indicates the amount of interest that will be earned at the end of one year. D) T he annual percentage rate indicates the amount of interest including the effect of compounding. 2) T he effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to: 2) _______ A) 8 .30% B) 8 .66% C) 8 .00% D) 7 .72% Use the table for the question(s) below. Consider the following investment alternatives: Investment Rate Compounding A 6.25% Annual B 6.10% Daily C 6.125 Quarterly D 6.120 Monthly 3) T he highest effective rate of return you could earn on any of these investments is closest to: 3) _______ A) 6 .267% B) 6 .310% C) 6 .250% D) 6 .295% 4) The effective annual rate for a certificate of deposit that pays 3.9% APR compounded monthly is closest to: 4) _______ A) 3.90% B) 3.83% C) 3.97% D) 4.04% 5) W hich of the following statements is FALSE? 5) _______ A) T he Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. B) T he interest rates that are quoted by banks and other financial institutions are nominal interest rates. C) F undamentally, interest rates are determined by the Federal Reserve. D) T he interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan. Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: Term 1 year 2 years 3 years 5 years 10 years 20 years Rate 5.00% 4.80% 4.60% 4.50% 4.25% 4.15% (EAR%) 6) T he NPV of an investment that costs $2700 and pays $1000 certain at the end of one, three, and five years is closest to: 6) _______ A) - 100.26 B) - 71.38 C) $ 1665.62 D) 2 1.47 7) T he effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is closest to: 7) _______ A) 1 0.00% B) 1 0.38% C) 9 .65% D) 1 2.50% 8) T he effective annual rate (EAR) for a savings account with a stated APR of 4% compounded daily (use 365 day year) is closest to: 8) _______ A) 4 .08% B) 1 4.60% C) 3 .92% D) 4 .00% 9) The effective annual rate for a credit card that charges a 19.9% APR compounded daily is closest to: 9) _______ A) 24.2% B) 18.15% C) 19.9% D) 22.0% 10) Wesley Mouch's auto loan requires monthly payments and has an effective annual rate of 6.43%. The APR on this auto loan is closest to: 10) ______ A) 6.50% B) 6.25%