Question

Which of the following statements is correct, assuming positive interest rates and holding other things constant?

Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays monthly. A deposit in Bank B will have a higher value in five years.

Banks A and B offer the same nominal annual rate of interest, but A pays interest daily and B pays semiannually. A deposit in Bank B will have a higher value in five years.

Banks A and B offer the same annual rate of interest, but A pays interest quarterly and B pays semiannually. A deposit in Bank B will have a higher value in five years.

Banks A and B offer the same nominal annual rate of interest, but A pays interest weekly and B pays quarterly. A deposit in Bank B will have a higher value in five years.

Answer #1

Ans- **Option 1 is correct.** Banks A and B offer
the same nominal annual rate of interest, but A pays interest
quarterly and B pays monthly. A deposit in Bank B will have a
higher value in five years.

- As when Nominal Interest rate and holding period are same, the Investment opportunity one should look for is in which of the opportunities compounding frequency is higher.

Compounding frequency is the no of periods in a year the interest will be compounded like in monthly compounding interest will be compounded 12 times in a year which will increase the Interest income as higher the compounding period higher is interest earned on Interest.

Thus, bank B pays monthly compounding will have a higher future value.

For a deposit of $1027 at 6.4% over 2 years, find the
interest earned if interest is compounded semiannually,
quarterly, monthly, daily, and continuously.
The interest earned if interest is compounded semiannually
is----
2
Find the present value of the following future amount.
$2000 at 10% compounded annually for 30 years
The present value is-----
3 Suppose a savings and loan pays a nominal rate of
1.4%
on savings deposits. Find the effective annual yield if interest
is compounded quarterly...

Which of the following statements is true?
a.
Due to payment risk, the interest rates at the beginning of a
fixed rate mortgage and adjustable rate mortgage of the same term
are the same.
b.
The monthly payment on a 15 year fixed rate mortgage equals
exactly two times the monthly payment on a 30 year fixed rate
mortgage with the same interest rate.
c.
Both of the above statements are true.
d.
Neither of the above statements are true....

1. Assuming all else is constant, which of the following
statements is CORRECT?
a. Other things held constant, a
20-year zero coupon bond has more reinvestment risk than a 20-year
coupon bond.
b. Other things held constant,
price sensitivity as measured by the percentage change in price due
to a given change in the required rate of return decreases as a
bond's maturity increases.
c. Other things held constant, for
any given maturity, a 1.0 percentage point decrease in the...

You have deposited $10,000 in a bank earning interest at 7% p.a.
compounded quarterly for four years and five months. At that time,
the interest rate changes to 6% p.a. compounded monthly. What is
the value of the deposit three years after the change in the rate
of interest?
What nominal annual rate compounded quarterly is equivalent to
7.5% p.a. compounded monthly?
You have decided to deposit $500 in the Montreal bank at the end
of each quarter for seven...

Periodic interest rates.
You have a savings account in which you leave the funds for one
year without adding to or withdrawing from the account. Which would
you rather have: a daily compounded rate of 0.055%, a weekly
compounded rate of 0.305%, a monthly compounded rate of 1.55%, a
quarterly compounded rate of 4.50%, a semiannually compounded rate
of 7%, or an annually compounded rate of 17%?
Calculate the EAR for each of the possible rates.

Find the interest rates in the following situations.
a. APR = 8%, compounded monthly. Find the effective annual
interest rate.
b. Nominal rate is 10% compounded quarterly. Find the effective
semiannual rate.
c. The effective annual interest rate is 11.02% and compounding
is monthly. Find the nominal interest rate.
d. r = 6% and compounding is monthly. Find the effective
quarterly interest rate.

11.
EFFECTIVE VERSUS NOMINAL INTEREST RATES
Bank A pays 6.5% interest compounded annually on deposits, while
Bank B pays 6% compounded daily.
a. Based on the EAR (or EFF%), which bank should you use?
(Select From I-V)
You would choose Bank A because its EAR is higher.
You would choose Bank B because its EAR is higher.
You would choose Bank A because its nominal interest rate is
higher.
You would choose Bank B because its nominal interest rate is...

Assuming all CDs have equal risk, which of the following CD’s
investments has the highest effective annual return (EAR)?
A bank CD that pays 8.78 percent compounded daily
A bank CD that pays 9.01 percent compounded monthly
A bank CD that pays 9.10 percent compounded quarterly
A bank CD that pays 9.17 percent compounded semiannually

Periodic interest rates.
You have a savings account in which you leave the funds for
one year without adding to or withdrawing from the account. Which
would you rather have: a daily compounded rate of 0.040%, a
weekly compounded rate of 0.305%, a monthly compounded rate of
1.45%, a quarterly compounded rater of 4.00%,a semiannually
compounded rate of 7%, or an annually compounded rate of 14%?
How does this get entered in a financial calculator? I have
10bii app

Two banks offer different interest rates on your deposit
of $10,000 over 3 years. Bank A offers an 8% interest compounded
annually and Bank B offers an 8.5% simple annual interest. Which
would earn the most interest (INT) over the 3 year period, and by
how much?

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