What is the effect of compounding interest?A. It decreases total interest earned over timeB. It keeps the interest constantC. It increases interest earned over time by earning interest on interestD. It applies only to loans, not investments
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What is the effect of compounding interest?
A. It decreases total interest earned over time
B. It keeps the interest constant
C. It increases interest earned over time by earning interest on interest
D. It applies only to loans, not investments
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Solved in 2 steps
- Simple interest refers to interest on a loan computed as a percentage of the loan amount. Compound interest refers to the process of, investing your money. saving your money. C a loan amortization. a loan computed at a nominal interest rate. E earning interest on interest.6. Time Value of Money: Comparing Interest Rates Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The -Select- interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for different securities is the same, then you -Select- use the APR for comparison. If the securities have different compounding periods, then the -Select- must be used for comparison. Here, M is the number of compounding periods per year and INOM/M is equal to the periodic rate (IPER). If a loan or investment uses -Select- the nominal interest rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is -Select- INOM.…Which one pays more (for the same amount and same interest rate), a saving account with a simple interest rate or with compounded interest rate?
- Loan Amount Is $430,000 Loan is a 7/30 Balloon Loan Annual Interest is 3.75%, with monthly payments What Is the monthly payment for the loan? Enter as a positive number4. How can effective APR differ from nominal interest? A. Effective APR takes loan fees into account, while nominal interest does not. B. Effective APR will always be less than the nominal interest rate. C. Effective APR is less accurate than the nominal interest rate. D. Nominal interest takes loan fees into account, while effective APR does not.How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)
- When the total interest charged is linearly proportional to the initial amount of the loan, the interest rate and the number of interest periods, the interest is said to be a.) Effective b.) Continuous Compounding c.) Simple d.) CompoundingWhat can you calculate with the Excel argument FV? Number of periods of time for a loan or investment. Interest rate. Future value of an investment based on a constant interest rate. The constant periodic payment required to pay off a loan or investment.What does the Excel argument Nper refer to? Number of periods of time for a loan or investment. The constant periodic payment required to pay off a loan or investment. Periodic interest rate. Present value of an investment.
- Which of the following is true about Interest Rate? i. The penalty for spending before earning is the interest rate from the point of view of the creditor. ii. Ceteris paribus, as the frequency of compounding increases, the APR will exceed the EAR by greater and greater amounts. iii. In the period 1950 - 1999 changes in the real rate were the main factor causing nominal interest rates to change. O A. ii and ii only O B. i only OC. i and iii only O D. None1. Explain how an installment loan differs from revolving credit in terms of risk and the nature of the return to the lender.Part B: Choose the correct option for each question (loans) A) increased, increased B) increased, decreased C) decreased, increased D) decreased, decreased E) Increased, No change F) Decreased. No change Question 1. For a loan, what effect does decreasing the interest rate have on the interest paid and length of loan? 2. For a loan, what effect does increasing the interest rate have on the interest paid and length of loan? 3. For a loan, what effect does decreasing the number of compounding periods have on the interest paid and length of loan? 4. For a loan, what effect does increasing the number of compounding periods have on the interest paid and length of loan? 5. For a loan, what effect does increasing the frequency of payments have on the interest paid and length of loan? 6. For a loan, what effect does decreasing the frequency of payments have on the interest paid and length of loan? Answer [Ex: F) Decreased, No change)