Question

Investment A has a quarterly interest rate of 5%. Investment B has a monthly interest rate of 2%. Which investment has the lower EAR?

A

B

A=B

Private mortgage insurance (PMI) benefits borrowers because it helps them make mortgage payments when they are having financial difficulty.

True

False

Bond A is a par bond and Bond B is a premium bond. All else equal, which bond has the higher coupon rate?

		A
		B
		A=B

Answer 1

Question 1:

• Investment A = 5% quarterly = [((1+5%)^4) - 1] = 21.55% EAR
• Investment B = 2% monthly = [((1+2%)^12) - 1] = 26.82% EAR
• Hence, Investment A has lower EAR.

Formula used:

Hence, the correct answer is Option A (Investment A).

Question 2:

Private mortgage insurance (PMI) keeps some asset as a security and benefits borrowers by helping them receive a mortgage loan when they are having financial difficulty.

Hence, the statement is false, because of the underline part.

Private mortgage insurance (PMI) provides them with mortgage loan when they are having financial difficulty. Mortgage payment is what the borrower pays back.

Hence, the correct answer is Option B (False).

Question 3:

Bond A is a par bond and Bond B is a premium bond. All else equal, both bonds will have same coupon rate as

• Coupon payment for both is equal
• Par value of both is equal

Hence, the correct answer is Option C (A=B).