Chapter 5
Chapter 5 Interest Rates
5.1 How Financial Institutions Quote Interest Rates: Annual and Periodic Interest Rates
1) If you take out a loan from a bank, you will be charged ________.
A) for principal but not interest
B) for interest but not principal
C) for both principal and interest
D) for interest only
Answer: C
2) A company selling a bond is ________ money.
A) borrowing
B) lending
C) taking
D) reinvesting
Answer: A
3) The phrase "price to rent money" is sometimes used to refer to ________.
A) historical prices
B) compound rates
C) discount rates
D) interest rates
Answer: D
4) Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?
A) The bank is borrowing money from you without a promise to repay that money with interest.
B) The bank is lending money to you with a promise to repay that money with interest.
C) The bank is technically renting money from you with a promise to repay that money with interest.
D) The bank is lending money to you, but not borrowing money from you.
Answer: C
Comment:
A) When you buy a CD, the bank DOES promise to repay both the principal and interest due.
B) When you buy a CD, the bank is NOT lending money to you but borrowing money from you.
D) When you buy a CD, the bank is renting or borrowing money from you; it is NOT lending money to you.
5) Which of the following statements is FALSE?
A) The APR can be referred to as a promised annual percentage rate.
B) Although an APR is quoted on an annual basis, interest can be paid quarterly.
C) The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year.
D) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
Answer: D
Comment: Interest CAN BE PAID DAILY (even though it may not be the common mode of payment).
6) To determine the interest paid each compounding
5.1 How Financial Institutions Quote Interest Rates: Annual and Periodic Interest Rates
1) If you take out a loan from a bank, you will be charged ________.
A) for principal but not interest
B) for interest but not principal
C) for both principal and interest
D) for interest only
Answer: C
2) A company selling a bond is ________ money.
A) borrowing
B) lending
C) taking
D) reinvesting
Answer: A
3) The phrase "price to rent money" is sometimes used to refer to ________.
A) historical prices
B) compound rates
C) discount rates
D) interest rates
Answer: D
4) Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?
A) The bank is borrowing money from you without a promise to repay that money with interest.
B) The bank is lending money to you with a promise to repay that money with interest.
C) The bank is technically renting money from you with a promise to repay that money with interest.
D) The bank is lending money to you, but not borrowing money from you.
Answer: C
Comment:
A) When you buy a CD, the bank DOES promise to repay both the principal and interest due.
B) When you buy a CD, the bank is NOT lending money to you but borrowing money from you.
D) When you buy a CD, the bank is renting or borrowing money from you; it is NOT lending money to you.
5) Which of the following statements is FALSE?
A) The APR can be referred to as a promised annual percentage rate.
B) Although an APR is quoted on an annual basis, interest can be paid quarterly.
C) The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year.
D) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
Answer: D
Comment: Interest CAN BE PAID DAILY (even though it may not be the common mode of payment).
6) To determine the interest paid each compounding