1215

Which of the following statements about compounding and interest rates is least accurate?

A) Present values and discount rates move in opposite directions.

B) All else equal, the longer the term of a loan, the lower will be the total interest you pay.

C) On monthly compounded loans, the effective annual rate (EAR) will exceed the annual percentage rate (APR).

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Since the proportion of each payment going toward the principal decreases as the original loan maturity increases, the total dollars interest paid over the life of the loan also increases.

1215

John is getting a $25,000 loan, with an 8% annual interest rate to be paid in 48 equal monthly installments. If the first payment is due at the end of the first month, the principal and interest values for the first payment are closest to:

Principal

Interest

A)  $410.32 $200.00

B)  $443.65   $166.67

C)  $443.65   $200.00

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Calculate the payment first:

N = 48; I/Y = 8/12 = 0.667; PV = 25,000; FV = 0; CPT PMT = 610.32.

Interest = 0.006667 × 25,000 = $166.67; Principal = 610.32 – 166.67 = $443.65 .

1215

An individual borrows $200,000 to buy a house with a 30-year mortgage requiring payments to be made at the end of each month. The interest rate is 8%, compounded monthly. What is the monthly mortgage payment?

A) $2,142.39.

B) $1,467.53.

C) $1,480.46.

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With PV = 200,000; N = 30 × 12 = 360; I/Y = 8/12; CPT → PMT = $1,467.53.