An investment offers a stated annual rate of 6 percent compounded monthly. What is the effective annual rate?
Explanation
EAR accounts for compounding frequency. Monthly compounding means m=12.
Other questions
An interest rate is best described as which of the following?
Which component is added to the real risk-free rate to determine the nominal risk-free rate?
The risk that a borrower will not make promised payments in a timely manner is best described as:
Which of the following premiums compensates investors for the risk of loss when converting an asset to cash quickly?
Given a stated annual interest rate of 10 percent compounded quarterly, what is the Effective Annual Rate (EAR)?
As the frequency of compounding increases within a year, holding the stated annual rate constant, what happens to the Effective Annual Rate (EAR)?
An investor deposits 1,000 USD today into an account earning 8 percent compounded annually. How much will the account be worth in 5 years?
What is the future value of 500 USD invested today at 6 percent compounded quarterly for 2 years?
An investor wants to have 10,000 USD in 5 years. If the account earns 5 percent compounded annually, how much must be deposited today?
How much must be invested today at 8 percent compounded semiannually to accumulate 5,000 USD in 4 years?
Which of the following best describes an ordinary annuity?
What is the Future Value of an ordinary annuity paying 200 USD per year for 3 years at 10 percent interest?
Calculate the Present Value of an ordinary annuity of 500 USD per year for 5 years at 6 percent.
An annuity due is distinguished from an ordinary annuity by which feature?
If the Future Value of an ordinary annuity is 1,000 USD, what is the Future Value of an annuity due with the same terms (same N, PMT, and I/Y)?
Calculate the Future Value of an annuity due paying 100 USD per year for 3 years at 5 percent.
What is the Present Value of an annuity due of 200 USD for 3 years at 10 percent?
A perpetuity pays 100 USD per year indefinitely. If the required rate of return is 5 percent, what is the present value?
Preferred stock paying a fixed dividend of 4.50 USD forever is priced with a required return of 8 percent. What is its value?
What is the present value of the following cash flow stream at 10 percent? Year 1: 100 USD, Year 2: 200 USD, Year 3: 300 USD.
Calculate the Future Value at the end of year 3 of these cash flows earning 10 percent: Year 1: 100 USD, Year 2: 200 USD, Year 3: 300 USD.
The Cash Flow Additivity Principle implies that:
To fund a future liability of 10,000 USD due in 5 years, how much must be deposited annually (end of year) starting one year from now at 7 percent?
A loan of 5,000 USD is to be repaid in equal annual installments over 5 years at 9 percent. What is the annual payment?
How many years will it take for 1,000 USD to grow to 2,000 USD at 8 percent compounded annually?
An investment quadruples in value over 12 years. What is the annual compound rate of return?
Constructing a time line is most useful for:
Which calculator mode should be used for an annuity where the first payment occurs today?
A deferred annuity is one where:
To calculate the PV of a deferred annuity starting in Year 4 (first payment at t=4), one approach is to find the PV of the annuity at t=3 and then:
In a loan amortization schedule for a standard fixed-rate mortgage, the interest component of the payment:
Calculate the PV of a perpetuity paying 100 USD starting 4 years from now (first payment at t=4) at 5 percent.
The formula PV = FV / (1 + I/Y)^N assumes:
If a bank quotes a savings rate of 4 percent compounded daily, and another offers 4 percent compounded quarterly, which should you choose?
What is the key difference between the cash flow keys (CF) and time value keys (TVM) on a financial calculator?
An investor puts 100 USD in a bank account at t=0. At t=1, the balance is 110 USD. He deposits another 100 USD at t=1. If the rate remains 10 percent, what is the balance at t=2?
If you need 50,000 USD for a down payment in 3 years, and you can earn 6 percent compounded monthly, how much must you deposit today?
Real risk-free rate = 2 percent. Inflation premium = 3 percent. Default risk premium = 2 percent. Liquidity premium = 1 percent. Maturity risk premium = 1 percent. What is the nominal risk-free rate?
Using the same premiums as Question 39, what is the required interest rate on a 10-year corporate bond with those specific risk characteristics?
Which of the following is strictly a theoretical rate?
If a cash flow stream pays 200 USD at t=1 and 200 USD at t=2, it is best described as:
Calculating the number of periods (N) to reach a financial goal requires:
An investor makes a 500 USD payment at the beginning of each of the next 3 years. This stream is:
The stated annual interest rate is 12 percent. What is the semiannual periodic rate?
The sum of the present values of a series of cash flows is the:
A 1,000 USD par value bond pays a 50 USD coupon annually and matures in 10 years. If the discount rate is 5 percent, the bond price is closest to:
In TVM calculations on a financial calculator, if PV is entered as a negative number, FV will be:
An investment of 100 USD yields 150 USD in 4 years. The equation to find the annual rate r is:
Generally, opportunity cost is best defined as: