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The present value of a 3-year, $150 annuity due will exceed the present
value of a 3-year, $150 ordinary annuity.
If a loan has a nominal annual rate of 8%, then the effective rate can
never be greater than 8%.
If a loan or investment has annual payments, then the effective, periodic,
and nominal rates of interest will all be different.
The proportion of the payment that goes toward interest on a fully
amortized loan increases over time.
An investment that has a nominal rate of 6% with semiannual payments
will have an effective rate that is smaller than 6%
11. Which of the following statements regarding a 15-year (180-month)
$125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and
transactions costs.)
1)
The remaining balance after three years will be $125,000 less one
third of the interest paid during the first three years.
2) Because the outstanding balance declines over time, the monthly
payments will also decline over time.
3) Interest payments on the mortgage will increase steadily over time,
but the total amount of each payment will remain constant.
4)
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.
5)
The outstanding balance declines at a faster rate in the later years
of the loan’s life