Question

Your bank is offering an account that will 16% interest (an effective two -year rate) in total for two-year deposit. Determine the equivalent discount rate for the following periods: (a) Six months (b) One year (c) One month.

Answer 1

The formula is as followed:

(a) Six months

• Effective Rate = 16%
• No. of "6 months" in 2 years = 4

Putting the values in the formula:

we get: R = 3.78%

Hence, the "6 months" rate which is equivalent to 2-year 16% is 3.78%.

(b) One year

• Effective Rate = 16%
• No. of "1 years" in 2 years = 2

Putting the values in the formula:

we get: R = 7.7%

Hence, the "1 year" rate which is equivalent to 2-year 16% is 7.7%.

(c) One month

• Effective Rate = 16%
• No. of "1 months" in 2 years = 24

Putting the values in the formula:

we get: R = 0.62%

Hence, the "1 month" rate which is equivalent to 2-year 16% is 0.62%.