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 earn a stated interest rate of 13.20%; however, interest will be compounded quarterly. What are the nominal (or stated), periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate Tim needs a loan and is speaking to several lending agencies about their interest rates and loan terms. He particularly likes his local bank because he is being offered a nominal rate of 12.00%. However, since the bank is compounding its interest semiannually, the loan will impose an effective interest rate of on his loan Another bank is also offering favorable terms, so Tim decides to take a loan of $25,000 from this bank. He signs the loan contract at 15.60% compounded dally for six months. Based on a 365-day year, what is the total amount that Tim owes the bank at the end of the loan's term? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.) O $27,025.66 O $27.971.56 O $20,376.94 O $20,647.20

Answer 1

А B 1 Nominal rate 13.20% 2 Periodic rate 3.30% 3 Effective annual rate 13.87% 4 5 Effective interest rate 12.36% 6 7 Total amount tim owes $ 27,025.66

calc:

А B 1 Nominal rate 0.132 2 Periodic rate =B1/4 3 Effective annual rate =(1+B1/4)^4-1 4 5 Effective interest rate =(1+12%/2)^2-1 6 7 Total amount tim owes =FV(15.6%/365,6/12*365,,-25000)