Skills Check

image Skills Check

Question 22.1

1. The interest charged on federal direct student loans while you are in school is

  1. simple interest.
  2. compound interest, compounded daily.
  3. compound interest, compounded quarterly.

1.

a

Question 22.2

2. If you borrow $1000 at 5% interest per year, compounded quarterly, and pay back the principal and interest after four years, the amount that you pay back is _____________.

2.

$1219.89

Question 22.3

3. A nominal rate of interest

  1. takes into account any compounding involved.
  2. is always stated as an annual rate.
  3. Neither of the above is correct.

3.

c

Question 22.4

4. If at the end of each month, you put $100 in an account that pays 6% annual interest compounded monthly, at the end of the two years, you will have _________________.

4.

$2543.20

Question 22.5

5. An effective interest rate

  1. always takes inflation into account.
  2. is the same as the nominal rate.
  3. takes compounding into account.

5.

c

Question 22.6

6. APR stands for _______________.

6.

annual percentage rate

Question 22.7

7. The nominal rate of interest for a loan is

  1. the same as the effective rate.
  2. less than the effective rate.
  3. never greater than the effective rate.

7.

c

Question 22.8

8. If a store credit account charges 1.5% interest each month, the effective annual rate is _________________.

8.

19.56%

Question 22.9

9. Credit card interest is

  1. computed using compound interest.
  2. computed using simple interest.
  3. included in the late fees.

9.

a

Question 22.10

10. If a store credit account charges 1.5% interest each month, the APR is _______________.

10.

18%

Question 22.11

11. The APR calculated for a loan takes into account the amount of

  1. the loan.
  2. the loan plus any loan-processing fee.
  3. the loan plus any loan-origination fee and any other closing costs.

11.

a

Question 22.12

12. The median length of time that Americans hold a mortgage is ________________.

12.

5 years

Question 22.13

13. The Truth in Lending Act requires that borrowers be told the ______________ of the loan.

  1. APY
  2. APR
  3. EAR

13.

b

Question 22.14

14. Your credit union offers to finance a $6000 conventional loan at 4% to be repaid in four years of monthly payments. Your monthly payment is ________________.

14.

$135.47

Question 22.15

15. After 15 years of minimum payments on a 30-year mortgage, the balance remaining is about ____________ of the original balance.

  1. one-third
  2. one-half
  3. two-thirds

15.

c

Question 22.16

16. If you finance $15,000 for 3 years at 6% compounded monthly, the monthly payments will be _____________.

16.

$456.33

Question 22.17

17. Equity in a 30-year conventional mortgage grows

  1. linearly.
  2. logarithmically.
  3. exponentially, but slowly.

17.

c

Question 22.18

18. Monthly payments for a 15-year, 6% mortgage are about _____________ times the payments for a 30-year mortgage of the same amount and the same interest rate.

18.

1.25 to 1.5

Question 22.19

19. An ARM

  1. has variable interest rates but maintains a fixed payment amount.
  2. has variable payment amounts.
  3. is always a better alternative to a fixed-rate mortgage

935

19.

b

Question 22.20

20. In a 30-year mortgage, most of the amount of the first several payments goes toward _____________.

20.

interest

Question 22.21

21. With a conventional loan,

  1. each payment pays current interest and repays part of the principal.
  2. you pay exactly the same current interest rate as everyone else.
  3. you have to buy a conventional house—no condos, triple-deckers, or yurts allowed.

21.

a

Question 22.22

22. A convenient rule of thumb is that for a 30-year mortgage at 6%, the monthly payment is about 0.6% of the loan. So, on a $100,000 mortgage, the monthly payment is about $600. About ___________ of the first payment goes toward interest.

22.

$500

Question 22.23

23. Most people

  1. never pay off their home mortgage loan.
  2. pay off their home mortgage loan early.
  3. make late payments on their home mortgage loan.

23.

b

Question 22.24

24. A high rate of inflation is likely to mean ____________ payments on your ARM.

24.

higher

Question 22.25

25. In this chapter, equity refers to

  1. fair lending practices.
  2. principal paid off on a loan.
  3. a union that represents actors and stage managers for live theatrical performances.

25.

b

Question 22.26

26. ARM stands for ____________.

26.

adjustable rate mortgage

Question 22.27

27. Paying off a conventional loan is like

  1. saving.
  2. slaving.
  3. shaving.

27.

a

Question 22.28

28. If you just won a lottery jackpot paid in 25 equal annual installments of $1 million each at 6% annual effective interest, the present value of the jackpot is ____________.

28.

$13.55 million if you get the first million right away and $12.78 million if you have to wait a year for the first million

Question 22.29

29. A life income annuity is designed to pay a fixed amount each period until

  1. the annuity runs out of money.
  2. you die.
  3. you reach your life expectancy.

29.

b

Question 22.30

30. A professional who assesses the costs of risks for life insurance, auto insurance, health insurance, or pensions is called a(n) ____________.

30.

actuary