Asked by Dejanece Thomas on Jul 21, 2024
Verified
Which of the following statements is NOT correct?
A) The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
B) If a loan has a nominal annual rate of 8%, then the effective rate can never be less than 8%.
C) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be the same.
D) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is less than 6%.
Present Value
The present worth of a future amount of money or series of cash flows, when calculated using a particular return rate.
Nominal Annual Rate
The interest rate stated on a loan or financial product, not adjusted for inflation or the compounding of interest within a year.
Effective Rate
The actual interest rate on a loan or financial product, taking into account the compounding of interest over time, contrasting with the nominal rate.
- Understand the distinction between nominal and effective interest rates, including their calculation methods.
- Examine the valuation of annuities and differentiate between ordinary annuities and annuities due.
Verified Answer
MG
Mallory GoodwinJul 25, 2024
Final Answer :
D
Explanation :
The effective rate of an investment with a nominal rate of 6% and semiannual payments will actually be higher than 6% due to the effect of compounding within the year.
Learning Objectives
- Understand the distinction between nominal and effective interest rates, including their calculation methods.
- Examine the valuation of annuities and differentiate between ordinary annuities and annuities due.