21) Corey buys 10 Tulift 4-post, 4.5-ton car hoists for his parking garage at a total cost of
$432,000. He inances this with a ive-year loan at 7.80% APR with monthly payments.
After he has made the irst 20 payments, how much is the outstanding principal balance on
his loan?
A) $244,965
B) $428,689
C) $306,206
D) $612,412
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
22) Assume your current mortgage payment is $900 per month. If you begin to pay $1,000
per month (with the extra $100 per month going to principal), which of the following will
be TRUE?
A) The mortgage balance will decrease faster with $1,000 monthly payment compared to
$900 monthly payments.
B) The total amount paid (principal and interest) will increase with $1,000 monthly
payment compared to $900 monthly payments.
C) The total interest expense will increase with $1,000 monthly payment compared to $900
monthly payments.
D) The total principal paid will decrease with $1,000 monthly payment compared to $900
monthly payments.
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
21
23) Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If
you were to reinance the mortgage today for 20 years at an APR of 4.25%, how much
would your monthly payment change by?
A) The monthly payment will increase by $104.79.
B) The monthly payment will decrease by $104.79
C) The monthly payment will increase by $343.12.
D) The monthly payment will decrease by $343.12.
AACSB Objective: Relective Thinking Skills
Author: WC
Question Status: New
24) Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000. If
you were to reinance the mortgage today for 20 years at an APR of 3.95%, how much
would you save in total interest expense?
A) $200,503
B) $150,377
C) $50,126
D) $100,251
AACSB Objective: Relective Thinking Skills
Author: WC
Question Status: New
22
25) Your irm needs to invest in a new delivery truck. The life expectancy of the delivery
truck is ive years. You can purchase a new delivery truck for an upfront cost of $240,000,
or you can lease a truck from the manufacturer for ive years for a monthly lease payment
of $4800 (paid at the end of each month). Your irm can borrow at 7.80% APR with
quarterly compounding.
The present value (PV) of the lease payments for the delivery truck is closest to ________.
A) $190,506
B) $238,132
C) $285,758
D) $333,385
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
26) You are considering purchasing a new automobile with the upfront cost of $25,000 or
leasing it from the dealer for a period of 60 months. The dealer ofers you 4.00% APR
inancing for 60 months (with payments made at the end of the month). Assuming you
inance the entire $25,000 through the dealer, your monthly payments will be closest to
________.
A) $368
B) $460
C) $552
D) $645
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
27) You are considering purchasing a new automobile with the upfront cost of $26,000 or
leasing it from the dealer for a period of 48 months. The dealer ofers you 2.80% APR
inancing for 48 months (with payments made at the end of the month). Assuming you
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inance the entire $26,000 through the dealer, your monthly payments will be closest to
________.
A) $459
B) $688
C) $573
D) $802
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
28) You are purchasing a new home and need to borrow $380,000 from a mortgage lender.
The mortgage lender quotes you a rate of 5.75% APR for a 30-year ixed rate mortgage.
The mortgage lender also tells you that if you are willing to pay two points, they can ofer
you a lower rate of 5.45% APR for a 30-year ixed rate mortgage. One point is equal to 1%
of the loan value. So if you take the lower rate and pay the points, you will need to borrow
an additional $7600 to cover points you are paying the lender.
Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then
your monthly mortgage payment (with payments made at the end of the month) will be
closest to ________.
A) $2439
B) $2661
C) $2218
D) $3105
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Revised
29) You are purchasing a new home and need to borrow $260,000 from a mortgage lender.
The mortgage lender quotes you a rate of 6.80% APR for a 30-year ixed rate mortgage.
The mortgage lender also tells you that if you are willing to pay two points, they can ofer
you a lower rate of 6.50% APR for a 30-year ixed rate mortgage. One point is equal to 1%
of the loan value. So if you take the lower rate and pay the points, you will need to borrow
24
an additional $5200 to cover points you are paying the lender.
Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your
monthly mortgage payment (with payments made at the end of the month) will be closest to
________.
A) $1844
B) $1676
C) $2011
D) $2347
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
30) Two years ago you purchased a new SUV. You inanced your SUV for 60 months (with
payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments
are $386.19 and you have just made your 24th monthly payment on your SUV.
The amount of your original loan is closest to ________.
A) $22,000
B) $20,000
C) $24,000
D) $28,000
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
31) Two years ago you purchased a new SUV. You inanced your SUV for 60 months (with
payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments
are $388.05 and you have just made your 24th monthly payment on your SUV.
Assuming that you have made all of the irst 24 payments on time, then the outstanding
principal balance on your SUV loan is closest to ________.
A) $14,000
B) $12,727
25
C) $15,273
D) $17,818
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
26
32) You are in the process of purchasing a new automobile that will cost you $25,000. The
dealership is ofering you either a $1,000 rebate (applied toward the purchase price) or
3.9% inancing for 60 months (with payments made at the end of the month). You have
been pre-approved for an auto loan through your local credit union at an interest rate of
7.5% for 60 months. Should you take the $1,000 rebate and inance through your credit
union or forgo the rebate and inance through the dealership at the lower 3.9% APR?
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Revised
27
33) You are purchasing a new home and need to borrow $325,000 from a mortgage lender.
The mortgage lender quotes you a rate of 6.5% APR for a 30-year ixed rate mortgage (with
payments made at the end of each month). The mortgage lender also tells you that if you
are willing to pay one point, they can ofer you a lower rate of 6.25% APR for a 30-year
ixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower
rate and pay the points, you will need to borrow an additional $3,250 to cover points you
are paying the lender. Assuming that you do not intend to prepay your mortgage (pay of
your mortgage early), are you better of paying the one point and borrowing at 6.25% APR
or just taking out the loan at 6.5% without any points?
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Revised
34) How are interest and return of principal handled in an amortizing loan payment?
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: SS
Question Status: Revised
5.3 The Determinants of Interest Rates
1) Market forces determine interest rates based ultimately on the willingness of
individuals, banks, and irms to borrow, save, and lend.
Dif: 1 Var: 1
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Revised
2) The real interest rate is the rate of growth of one’s purchasing power due to money
invested.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
3) Quality adjustments to changes in the CPI most often result in reductions to the inlation
rate calculated from it.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
4) What is the real interest rate given a nominal rate of 8.9% and an inlation rate of 1.9%?
A) 6.9%
B) 8.2%
C) 9.6%
D) 11.0%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
29
5) Which of the following computes the growth in purchasing power?
A) growth of money + growth of prices
B) (1 + real rate) / (1 + nominal rate)
C) (1 + inlation rate) / (1 + nominal rate)
D) growth of money / growth of prices
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Revised
6) In 2007, interest rates were about 4.5% and inlation was about 2.8%. What was the real
interest rate in
2007?
A) 1.58%
B) 1.61%
C) 1.62%
D) 1.65%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) Given that the inlation rate in 2006 was about 3.24%, while a short-term municipal bond
ofered a rate of 2.9%, which of the following statements is correct?
A) The purchasing power of investors in these bonds grew over the course of the year.
B) The real interest rate for investors in these bonds was greater than the rate of inlation.
C) Investors in these bonds were able to buy less at the end of the year than they could
have purchased at the start of the year.
D) The nominal interest rate ofered by these bonds gave the true increase in purchasing
power that resulted from investing in these bonds.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
30