Question

1. 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 10%. But the bank is compounding bimonthly (every two months). What is the effective interest rate that Rahul would pay for the loan?

a. 10.603% b. 10.426% c. 10.609% d. 10.285%

2. Another bank is alos offering favorable terms, so Rahul decides to take a loan of $12,000 from this bank. He signs the loan contract for 13% compounded daily for six months. Based on 365-day year, what is the total amount that Rahul owes the bank at the end of the loans term? (HINT: to calculate the number of days, divide the number of months by 12 and multiply by 365.)

a. $13,317.99 b. $12,085.76 c. $12,677.70 d. $13,446.05

Answer #1

. Nonannual compounding period
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.
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