Interest Rates

Question 1

What is compound interest

Answer 1

The fact that you earned an interest on what you’ve earned in interest in addition to what you had

Question 2

How do you compound a sum by an interest rate

Answer 2

You multiply the sum with one plus the interest rate exponentiated by the times it is compounded

Question 3

If the annual interest rate is given but the compounding happens every month how large is the monthly interest rate

Answer 3

The annual interest rate divided by twelve

Question 4

If an account is compounded by an annual interest rate monthly by what factor will the account grow in a year

Answer 4

(1 + i/12)^12 = (1 + i/m)^m

Question 5

Do you earne more if you compound by a twelfth of the annual interest rate monthly or if you simply compound by the annual interest rate anually

Answer 5

You earn more if you do it monthly

Question 6

What is the multiplication factor to your account if you continually compound it by an interest rate an infinite time in the intervals.

Answer 6

e^i when the period m which is the parts the annual interest rate is divided in and the times the expression is exponentiated approaches infinity

Question 7

What ways are interest rates quoted

Answer 7

Ear aka effective annual rate and apr annual percentage rate

Question 8

What is the annual percentage interest rate

Answer 8

The sum of the monthly interest rates or other periods of time the bank uses fir compounding during a year

Question 9

What is the effective annual interest rate

Answer 9

The perceptual increase that is the result of compounding the interest if the compounding period over a year

Question 10

Which is largest ear or apr

Answer 10

Ear

Question 11

How is the effective annual rate and annual percentage rate related

Answer 11

1+ear = (1+ APR/m )^m

Question 12

How many times do you compound if it is stated that you compound semi anually

Answer 12

Two times a year

Question 13

What factors affect interest rates

Answer 13

Supply and demand for money. Inflation and the central bank affects this. Also the term structure which is about the nature if the contract if it is long or short term

Question 14

How do you calculate the inflation rate with the consumer price index

Answer 14

The future consumer price index divided by the old consumer price index subtracted by one

Question 15

What is the relationship between real and nominal interest rate

Answer 15

1+r = (1+i)/(1+inf) real accounts for inflation

Question 16

Can the central banks affect long terme interest rates

Answer 16

No

Question 17

Should we invest in short term bonds or ling term if we expect short term rates to increase and the long term rate is less or equal ti the short term rate

Answer 17

We should invest short term and reinvest when the bonds mature

Question 18

Why are long term interest rates generally higher

Answer 18

Because the time value of money. Cannot reinvest if the money is looked up in long term bonds

Question 19

When might long term rates be lower than short term interest

Answer 19

If we expect rates to decrease in the future demand for long term decreases

Question 20

What is the fisher effect

Answer 20

That real interest rates stay somewhat constant long term as inflation increases when interest increases