Question

19. Suppose interest rates were not 12% (APR, monthly compounded) but 20% (EAR). How would your
answer change?

a) Victoria’s contributions would be bigger because interest rates increased.
b) Victoria’s contributions would not change.
c) Victoria’s contributions would be smaller.
d) Victoria’s contributions would be bigger because the present value of the cabin will be smaller.
e) Victoria’s contributions would be smaller because the future value of the cabin will be bigger.

Answer 1

Solution:

19) Determining when Interest Rates were not 12% (APR, monthly compounded) but 20 (EAR). How would your answer change:

Right Option is c) Victoria’s contributions would be smaller.

When the change in the Interest Rates the Victoria has the Smaller Contributions, because the 20% Effective Annual Rate (EAR) is Higher than the 12% Annual Interest Rate (APR). When the Effective Interest Rate is higher then the Contribution of the Customer will be Smaller. So, the Right Option is c).