Finance

The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the real rate? Use exact formulation.

a. 8.75%

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b. 11.00%

c. 6.09%

d. 6.00%

e. 11.39%

The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the risk-free rate? Use exact formulation. (Hint: Set risk premium equal to zero!)

a. 6.09%

b. 7.50%

c. 8.75%

d. 7.62%

e. 6.00%

The APR on a financial security is 12 percent. If the inflation premium is 4 percent and the pure rate is 3 percent, what risk premium is required by the market?

a. 4.74%

b. 3.81%

c. 5.00%

d. 5.37%

e. 4.56%

Use the following information for this and the following three questions.

A bank wishes to earn a pure rate of 2 percent, and the inflation premium is 1.6%. The bank uses the Fair Issac Corporation (FICO) score to determine car loan rate for its customers. Based on an automobile loan applicant’s FICO score, it uses the following risk premium adjustment to the rate it quotes.

FICO Score Risk Premium %

>740           1.00%

720-739      1.10%

700-719      1.30%

680-699      1.60%

660-679     1.90%

640-659     2.20%

620-639     2.50%

<620           7.50%

What annual percentage rate will it quote to John Smith who has a FICO score of 645?

a. 6.22%

b. 5.60%

c. 11.40%

d. 5.91%

e. 5.29%

If John Smith’s FICO score drops to 615, what will be the percent change in the APR?

a. – 29.43%

b. 92.91%

c. 11.40%

d. 29.43%

e. – 92.91%

Jane Smith applies for a car loan to the bank and the bank quotes her an APR of 4.98 percent. In which range does Jane Smith’s FICO score fall?

a. 660-679

b. 720-739

c. 680-699

d. >740

e. 700-719

The average FICO score in the United States is about 692. What is the APR rate offered by the bank to the average customer?

a. 5.29%

b. 5.91%

c. 6.22%

d. 11.40%

 

e. 5.60%

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