Question

Ch 05 Assignment- Time Value of Money 11. Nonannual compounding period The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the presen values of cash flows. t and fut An investor can invest money with a particular bank and earn a stated interest rate of 4.40%; however, interest will be compounded quarterly. are the nominal, periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate 4,40% 1.10% 4.47% 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 %. But the bank is compounding bimonthly (every two months), what is the likes his local bank because he is being offered a nominal rate of 4 effective interest rate that Rahul would pay for the loan? O 4.188% 4.067% 4.244% 3.926% Another bank is also offering favorable terms, so Rahul decides to take a loan of S 12,000 from this bank. He signs the loan contract at 5% nths. Based on a 365-day year, what is the total amount that Rahul owes the bank at the end of the loan's term? To calculate the number of days, divide the number of months by 12 and multiply by 3 65.) $12,615.21 $12,236.75 $13,245.97 $13,056.74

Answer 1

1. Nominal rate of interest = 4%

Compounding periods (m): Bi-monthly or 6

Effective Interest Rate = ((1+r/m)^m)−1

Substituting values: ((1+0.04/6)^6)−1

Effective Interest Rate = 4.0673%

2. Given loan amount = $12000

Nominal interest rate = 5%

Compounding (m): Daily in a 365 day year.

Again, first we calculate:

Effective Interest Rate = ((1+r/m)^m)−1 =((1+0.05/365)^365)−1 = 5.1267%

Total amount that Rahul owes at the end of the term = 12000*1.051267 = $12615.2