Question

Your bank is offering you an account that will pay 22% interest(effective in two-year rate) in total for two-year deposit. Determine the equivalent deposit rate for the following periods:

a. Six months

b. One year

c One month.

Answer 1

Answer a

Assume Semi annual rate to be r

no of periods in 2 years= 2*2=4

To get the effective rate of 22%, (1+r)^4-1=22%

Or, (1+r)^4=1.22

Or, 1+r= 1.22^(1/4)

Or,r= 1.051-1

Or,r=0.051 or 5.1%

Answer b

Assume annual rate to be r

no of periods in 2 years= 1*2=2

To get the effective rate of 22%, (1+r)^2-1=22%

Or, (1+r)^2=1.22

Or, 1+r= 1.22^(1/2)

Or,r= 1.1045-1

Or,r=0.1045 or 10.45%

Answer c

Assume monthly rate to be r

no of periods in 2 years= 12*2=24

To get the effective rate of 22%, (1+r)^24-1=22%

Or, (1+r)^24=1.22

Or, 1+r= 1.22^(1/24)

Or,r= 1.00832-1

Or,r=0.00832 or, 0.832%