Question

Calculate the Nominal Interest Rate, the Interest Rate per Compounding Period and the Effective Annual Interest Rate for the following problems:

1. A Bank is offering a saving account at 3% compounded monthly.

2. A Credit Card company says their card charges an APY of 8.5619% compounded quarterly.

3. Nomani wants to earn 0.25% per week.

Answer #1

1. A Bank is offering a saving account at 3% compounded monthly.

**Nominal interest rate=i=3%**

Number of compounding per year=c=12

**Interest rate per compounding
period=i/c=3%/12=0.25%**

**Effective rate of
interest=(1+i/c)^c-1=(1+0.25%)^12-1=3.0416%**

2. A Credit Card company says their card charges an APY of 8.5619% compounded quarterly.

In this case

**Effective rate of interest=ie=8.5619%**

Number of compounding per year=c=4

**Interest rate per compounding
period=i/c=(1+ie)^(1/c)-1=(1+8.5619%)^(1/4)-1=**2.0750%

**Nominal interest
rate=i=(i/c)*c=2.0750%*4=8.30%**

3. Nomani wants to earn 0.25% per week.

**Interest rate per compounding
period=i/c=0.25%**

Number of compounding per year=c=52

**Nominal interest
rate=(i/c)*c=0.25%*52=13.00%**

**Effective rate of
interest=(1+i/c)^c-1=(1+0.25%)^52-1=13.8644%**

. 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.
An investor can invest money with a particular bank and earn 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
You want to...

7. A credit card company runs an ad quoting a nominal interest
rate of 29 percent on charges. What is the effective interest rate
if interest is compounded quarterly? monthly? The effective annual
rate is ________if compounded quarterly and _______ if compounded
monthly

Exercise IV (effective and nominal interest rate)
a. The effective interest rate is 21.44%. If there are 12
compounding periods per year, what is the nominal interest
rate?
b. What is the effective interest rate on a continuously
compounded loan that has a nominal interest rate of 25%?
c. Which is the better investment, a fund that pays 20%
compounded annually, or one that pays 18.5 % compounded
continuously?
d. Money invested at 6% per year, compounded monthly. How
money...

a. The effective interest
rate is 21.44%. If there are 12 compounding periods per year, what
is the nominal interest rate?
b. What is the effective interest
rate on a continuously compounded loan that has a nominal interest
rate of 25%?
c. Which is the better
investment, a fund that pays 20% compounded annually, or one that
pays 18.5 % compounded continuously?
d. Money invested at 6% per year,
compounded monthly. How money months you need to triple your
money?...

2. A local credit union is advertising a car loan with
an APR of 6.75%. If interest is compounded monthly,
(a) what is the interest rate per compounding period, and (b) what
is the effective annual interest rate
(i.e., the APY)?
3. Your local credit union is offering a 5.1% APR mortgage with
monthly compounding (i.e., you pay them
once a month). A regional bank nearby is offering a 5.0% APR
mortgage with bi-monthly compounding
(i.e., you pay them twice...

5) What is the effective annual interest rate for a loan with a
nominal annual interest rate of 12% if compounded:
semi-annually. Answer ____________________
monthly. Answer _________________________
continuously. Answer _____________________
6) You make a series of quarterly deposits every quarter
starting at the end Quarter 1 and ending at the end of Quarter 36.
The first deposit is $1,100, and each deposit increases by $500
each Quarter. The nominal annual interest rate is 7%, and is
compounded continuously. What is...

2. PWC recently proposed to BMO to change the method of compounding
interest on line of credit accounts to monthly compounding, as part
of the marketing campaign. If the current rate is 2.5% compounded
quarterly, what nominal rate should the PWC suggest to BMO
executives to maintain the same effective rate of interest?

1. What nominal rate compounded annually would
quadruple the principal in 4
years?
2. A master card compounds monthly and charges an interest of 1.5%
per month.
What is the effective interest rate per year?
3. How long will it take money to triple itself if invested at 8%
compounded
annually?
4. Microsoft CEO, billionaire Bill Gates willed that a sum of $25
million be given to a
child but will be held in trust by the child’s mother until...

What is the effective monthly interest rate for a loan with a 8%
nominal annual interest rate if the loan is compounded
(a) monthly, (b) daily, or
(c) continuously?
A friend offers you a loan at an effective daily interest rate
of 0.2%. (a) What is the nominal (also known as
the APR or Annual Percentage Rate) rate for this loan?
(b) What is the effective annual interest rate for
his loan?
Show all work please

If a nominal interest rate compounded quarterly is 8%, what is
the annual effective discount rate?
SHOW FORMULAS AND GET THUMBS UP

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 12 minutes ago

asked 14 minutes ago

asked 17 minutes ago

asked 21 minutes ago

asked 56 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago