True/False Quiz for Chapter 10

Mathematics of Finance

Chapter 9 True/False Quiz

Chapter 10 Summary

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1. In an account earning simple interest, the interest from the first year is reinvested at the beginning of the second year. True False

2. An investment that earns compound interest is the same as one that earns simple interest at the effective yield. True False

3. In simple interest, the future value of an investment is always a linear function of the the number of years the investment is held. True False

4. If an investment earns compound interest, then its future value is not a linear function of the the number of years the investment is held. True False

5. If an investment pays interest at an annual rate of 5% per year, compounded twice a year, then the effective yield is larger than 5%. True False

6. If an investment pays interest at an annual rate of 5% per year, compounded once a year, then the effective yield is larger than 5%. True False

7. If an investment pays interest at an annual rate of 5% per year, compounded once a year, then the effective yield is smaller than 5%. True False

8. If, due to inflation, prices are rising by 1% every month, they will rise exactly 12% during the year. True False

9. If, due to inflation, prices are rising by 1% every month, they will rise by about 12.7% during the year. True False

10. An investment earning 20% interest compounded twice a year is better than one earning 19.7% interest compounded daily. True False

11. An investment earning 20% interest compounded twice a year is better than one earning 19% interest compounded daily. True False

12. If you deposit $200 each month into an interest-bearing account, and if your little brother withdraws $125 from the same account, the account is an increasing annuity. True False

13. If you invest $100 per month in an interest bearing account, then that account becomes a decreasing annuity the moment your investments stop. True False

14. On a mortgage or other long-term loan, the early payments go mostly to paying interest. True False

15. Shortening the period of a loan lowers the monthly payments. True False

16. Shortening the period of a loan lowers the total interest paid. True False

17. In a conventional mortgage, the lending institution is making regular payments into an increasing annuity. True False

18. In a conventional mortgage, the lending institution is making regular withdrawals from a decreasing annuity. True False

19. In a conventional mortgage, the borrower is making regular payments into an increasing annuity. True False

20. In a conventional mortgage, the borrower is making regular withdrawals from a decreasing annuity. True False