Question

Bank A offers a 2-year certificate of deposit (CD) that pays 10
percent compounded annually. Bank B offers a 2-year CD that is
compounded semi-annually. The CDs have identical risk. What is the
stated, or nominal, rate that Bank B would have to offer to make
you indifferent between the two investments?

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Answer #1

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1. You currently have AED40,000 and plans to purchase a 5-year
certificate of deposit (CD).
a. How much will you have when the CD matures if it pays 7%
interest, compounded annually?
b. How much will you have when the CD matures if it pays 6%, or
20% interest, compounded annually?
c. How much will you have when the CD matures if it pays 6%, or
20% interest, compounded semiannually?
d. Why does the annual compounding and semiannual compounding
give...

Suppose you have $2000 and plan to purchase a 10
year-certificate of deposit that pays 11.1% interest, compounded
annually. How much will you have when the CD matures?

Your local bank offers 4-year certificates of deposit (CDs) 12 %
compounded quarterly. How much additional interest will
you earn over 4 years on a $10,000 CD that is compounded quarterly,
compared with one that is compounded annually?
a.
$6,050
b.
$0
c.
$312
d.
$220
Please add calculations.

eBook
Bank A pays 10% interest compounded annually on deposits, while
Bank B pays 9.5% compounded daily.
a. Based on the EAR (or EFF%), which bank should you use?
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
higher.
You are indifferent between the banks and...

You want to purchase an 4-year certificate of deposit (CD) that
pays 3.7% interest per year.
If you put $2,000 into the CD today, how much money will you
have when the CD matures at the end of year 4?

Bank A pays 6% interest compounded annually on deposits, while
Bank B pays 5.75% compounded daily.
a. Based on the EAR (or EFF%), which bank should you use?
I. You would choose Bank A because its EAR is higher.
II. You would choose Bank B because its EAR is higher.
III].You would choose Bank A because its nominal interest rate
is higher.
IV. You would choose Bank B because its nominal interest rate is
higher.
V. You are indifferent between...

Bank A pays 4 percent interest, compounded annually, on
deposits, while Bank B pays 3.9 percent, compounded daily.
What is the effective rate offered by Bank A?
By Bank B?
Which bank should you use?

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...

1. If a bank advertises a savings account that pays a 6% nominal
interest rate compounded continuously, what is the effective annual
percentage rate?
2. Bank A offers a nominal annual interest rate of 5% compounded
daily, while Bank B offers continuous compounding at a 4.6% nominal
annual rate. If you deposit $3,000 with each bank, what will be the
difference in the two bank account balances after two years?
(Show ALL work and formulas used!)

The market price of a bond is $900 for a 10-year bond that pays
interest semi-annually at a coupon rate of 6% per annum. What is
the bond’s expected return, stated on an annual basis compounded
semi-annually? What is the bond’s expected return, stated on an
annual basis compounded annually? Show steps on how to
solve using excel and the formulas used as well as manually how to
solve it

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