Question

The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows. An Investor can Invest money with a particular bank and eam a stated interest rate of 6.60%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate L Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer. He particularly likes his local bank because he is being offered a nominal rate of 6%. But the bank is compounding bimonthly (every two months). What is the effective interest rate that Rahul would pay for the loan? 6.329% 6.466% 6.152% 06.030%

Answer 1

Formula to calculate effective annual rate
Effective annual rate	((1+r)^n-1)
Nominal rate is stated interest rate which is 6.60%
Periodic rate	1.65%	6.60%/4
Effective annual rate	(1.0165^4)-1
Effective annual rate	6.765%
Calculation of Rahul's effective interest rate
Periodic rate	1.00%	6%/6
Effective annual rate	(1.01^6)-1
Effective annual rate	6.152%
Calculation of total amount owe by Rahul on loan at end of 3 months
Total amount owe	Loan amount*((1+r)^n)
where r is interest rate and n is number of payments
Daily interest rate	0.04%	15%/365
Number of payments	91.25	(3/12)*365
Total amount owed	15000*(1.000411^91.25)
Total amount owed	$15,573.38
Thus, amount rahul owes $15,573.38 at end of three months