Contract Interest Rate

### What is the contract interest rate on a loan? - [x] The stated annual interest rate in the loan agreement. - [ ] The effective interest rate adjusted for compounding. - [ ] The rate that accounts for inflation. - [ ] The interest rate after deductions and fees. > **Explanation:** The contract interest rate is the stated annual interest rate in the loan agreement without adjustments for compounding or inflation. ### Does the contract interest rate account for inflation? - [ ] Yes, it accounts for inflation. - [x] No, it does not account for inflation. - [ ] It accounts for future inflation projections only. - [ ] It varies based on inflation. > **Explanation:** The contract interest rate does not take inflation into account; it is a nominal rate. ### Can the contract interest rate be variable? - [x] Yes, it can be variable as specified in the contract terms. - [ ] No, it is always fixed. - [ ] It depends on the economic conditions. - [ ] Only in certain loan types. > **Explanation:** The contract interest rate can be either fixed or variable, depending on the terms set forth in the contract. ### How does compounding affect the effective interest rate? - [x] Compounding results in an effective interest rate that can be higher than the contract interest rate. - [ ] Compounding lowers the effective interest rate. - [ ] There is no effect of compounding on the effective interest rate. - [ ] Compounding only affects the real interest rate. > **Explanation:** Compounding leads to interest being calculated on previously earned interest, potentially resulting in an effective interest rate higher than the contract rate. ### What is another term for the contract interest rate? - [ ] Effective interest rate - [ ] Real interest rate - [x] Face interest rate - [ ] Discount rate > **Explanation:** The face interest rate is another term used for the contract interest rate or nominal interest rate. ### What impact does the contract interest rate have on monthly loan payments? - [x] It determines the interest portion of each monthly payment. - [ ] It decides the total loan amount. - [ ] It changes the loan term. - [ ] It affects the loan application approval. > **Explanation:** The contract interest rate influences how much interest is included in each monthly loan payment, alongside the principal repayment. ### What aspect is not considered in the contract interest rate? - [x] Inflation - [ ] Loan principal - [ ] Loan duration - [ ] Interest type (fixed/variable) > **Explanation:** Inflation is not considered in the contract interest rate; it is a nominal value unaffected by changes in purchasing power. ### If a bond has a 6% contract interest rate, what does this mean for investors? - [ ] They will earn 6% after inflation adjustments. - [ ] They will pay 6% of the bond's face value annually. - [x] They will receive interest payments equaling 6% of the bond’s face value annually. - [ ] They are guaranteed a 6% return on investment. > **Explanation:** A 6% contract interest rate means investors will receive annual interest payments equivalent to 6% of the bond’s face value before considering any inflation or additional factors. ### Which entity typically sets the contract interest rate for a loan or bond? - [ ] Government regulations - [x] The lender or issuing entity - [ ] Financial markets - [ ] Borrower's financial advisor > **Explanation:** The contract interest rate is set by the lender or the entity issuing the bond, based on current market conditions, credit risk, and other factors. ### What is the primary distinction between the nominal interest rate and the real interest rate? - [x] The nominal rate does not consider inflation, while the real rate adjusts for it. - [ ] The nominal rate considers compounding, while the real interest rate does not. - [ ] The nominal rate is for bonds only, while the real rate is for loans. - [ ] There is no difference between the two terms. > **Explanation:** The nominal interest rate, or contract interest rate, does not take into account inflation, whereas the real interest rate is adjusted to reflect inflation’s impact on purchasing power.