"quantity"exercise:The required rate of return

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Questions 1:

The minimum rate of return an investor must receive in order to accept an investment is best described as the:

A、 internal rate of return.

B、 required rate of return.

C 、expected return.

Questions 2:

A borrower is considering three competing mortgage loan offers from her bank. The amount borrowed on the mortgage is $100,000 with monthly compounding.

quantity exercise:The required rate of return

The rate on the ARM resets at the end of Year 3. Assuming the ARM is permanently reset at 5.500% (i.e., the remaining balance on the loan is assumed to be repaid with a 5.500% stated annual interest), which of the three loans will have the smallest monthly payment after the rate reset at the end of Year 3?

A 、30-year fixed-rate loan

B 、20-year fixed-rate loan

C 、30-year ARM

View answer resolution

【Answer to question 1】 B

【analysis】

B is correct. The required rate of return is the minimum rate of return an investor must receive in order to accept an investment.

A is incorrect. The required rate of return is the minimum rate of return an investor must receive in order to accept an investment. The internal rate of return is the discount rate that makes net present value equal to zero

C is incorrect. The required rate of return is the minimum rate of return an investor must receive in order to accept an investment. The expected return is based on the expected value of a random variable and is not the minimum rate of return an investor must receive in order to accept an investment (i.e., the expected return could also be negative)

【Answer to question 2】A

【analysis】

A is correct. The timeline for the 30-year fixed rate is as follows:

quantity exercise:The required rate of return