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Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
a. The present value of a 5 year, $250 annuity due will be lower than the PV of a similar ordinary annuity. b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
c. A bank loan?s nominal interest rate will always be equal to or greater than its effective annual rate.
d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide a higher future value if you leave your funds on deposit.

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Answer: d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

Explanation:

Effective annual interest rate = (1 + (nominal rate / number of compounding periods)) ^ (number of compounding periods) - 1)

= (( 1 + ( 10% / 4)) ^ 4) - 1

= 10.38%

10.38% > 10%

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