Question

Determine the annual effective rate of interest on the major credit cards and charge-accounts in major department stores.

A bank pays 6% per annum on its savings accounts. At the end of every 3 years a 2% bonus is paid on the balance. Determine the annual effective rate of interest, j1, earned by an investor if the deposit is withdrawn: a) in 2 years, b) in 3 years, c) in 4 years.

An insurance company says you can pay for your life insurance by paying $100 at the beginning of each year or $51.50 at the beginning of each half-year. They say the rate of interest underlying this calculation is j2= 3%. What is the true value of j2?

On July 7, 2014, Mrs. Smith borrowed $1200 at j12 = 6.3%. How much would she have to repay on September 18, 2017?

Answer 1

Question : A bank pays 6% per annum on its savings accounts. At the end of every 3 years a 2% bonus is paid on the balance. Determine the annual effective rate of interest, j1, earned by an investor if the deposit is withdrawn: a) in 2 years, b) in 3 years, c) in 4 years.

Solution : We have, stated annual interest rate = 6% per annum, componding period (m) = 1 as interest rate is being compounded once in a year.

Annual Effective rate of interest (EAR) = ( 1 + Periodic interest rate )^m - 1 = (1 + 0.06)¹ - 1 = (1.06) - 1   = 0.06 i.e. 6%

So, EAR is 6%; Also it is a fact that when stated annual interest rate is compounded only once in a year, stated annual interest rate is always equal to annual effective interest rate.