1 Which of the following is the effective annual interest ra

1. Which of the following is the effective annual interest rate for a 5 percent nominal rate that is compounded daily?
      
A, 5.0945%
      
B, 5.1162%
      
C, 5.1246%
      
D, 5.1267%

2. What is the present value (rounded to the nearest dollar) of $12,000 due in 6 years discounted semiannually at a 5 percent nominal annual rate of interest?
      
A. $8,891
      
B. $8,895
      
C. $8,906
      
D. $8,923

3.At the end of year 5, what is the future value of the following series of deposits to a savings account that earns 6 percent compound annual interest?

Timing of Deposit Amount of Deposit
End of year 1 $ 1,000
End of year 2 1,000
End of year 3 0
End of year 4 2,000
End of year 5 2,000
      
A. $4,912.10
      
B. $5,096.82
      
C. $5,206.82
      
D. $6,573.49

4. Which of the following statements concerning the relationship between education and financial risk tolerance is correct?
      
A. Risk tolerance increases with the degree of formal education.
      
B. The relationship between the degree of formal education and risk tolerance increases through high school and then decreases.
      
C. Risk tolerance decreases with the degree of formal education.
      
D. There is no recognized relationship between the degree of formal education and risk tolerance.

5. Which of the following statements concerning types of interviews is correct?
      
A. A directive interview usually takes more time than a nondirective interview.
      
B. The advisor usually controls the pace and content of a nondirective interview.
      
C. A nondirective interview tends to be more flexible than a directive interview.
      
D. The client usually controls the pace and content of a directive interview.

Solution

1. Nominal rate, i = 0.05

n = 365

Effective annual rate = (1 + i/n )ⁿ - 1

= ( 1 + 0.05/365)³⁶⁵ - 1 = 0.051267

= 5.1267 % (D)

2. Present Value = A/(1+r)ⁿ

A = $12,000

r = 0.05/2 = 0.025

n = 6*2 = 12

PV after 6 years = 12000/(1+0.025)¹² = $ 8923 (D)

3. rate , r = 6% = 0.06

Amount paid at the end of 1st year = $1000

Interest at the end of 2nd year = 1000*(1+0.06) = $1060

Amount paid at the end of 2nd year = $1000

Total amount at the end of 2nd year = 1060 + 1000 = $ 2060

Interest at the end of 3rd year = 2060*(1+0.06) = $ 2183.6

Amount paid at the end of 3rd year = 0

Total amount at the end of 3rd year = $ 2183.6

Interest at the end of 4th year = 2183.6*(1+0.06) = $ 2314.616

Amount paid at the end of 4th year = $ 2000

Total amount at the end of 4th year = $ 4314.616

Interest at the end of 5th year = 4314.616*(1+0.06) = $ 4573.49

Amount paid at the end of 4th year = $ 2000

Total amount at the end of 4th year = $ 6573.49

(D)

4. (A) Risk tolerance increases with the degree of formal education.

5. (C) A nondirective interview tends to be more flexible than a directive interview.