k. 5 banks offer nominal rates of 6%, but differ in their compounding frequency.

Question

k. 5 banks offer nominal rates of 6%, but differ in their compounding frequency. A annually; B semiannually; C quarterly: D monthly; and E daily. No 6% $5,000 Deposit (i) Deposit S5,000. What is FV1? (iii Deposit S5,000. What is FV 2? 2) Would they be equally able to attract funds? No. People would prefer more compounding to less. (i) What nominal rate would cause all banks to provide same EAR as Bank A? I Now Each of these nominal rates based on the frequency of compounding will provide an EAR of 6%. (3) You need S5,000 at the end of the year. How much do you need to deposit annually for A, semiannually, for B, etc. beginning today, to have s5,000 at the end of the year? PMT (4) Even if the banks provided the same EAR, would a rational investor be indifferent between the banks? Probably not. An investor would probably prefer the bank that compounded more frequently.

Explanation / Answer

EAR 6% FV = PV (1+r)n A FV = 5000(1+.06)1 = 5000*1.06 = $ 5300 B FV = 5000(1+.06/2)2= 5000.0609 = $ 5305 C Fv = (5000(1+.06/4)4 = 5000*1.061= $5307 D FV = 5000(1+.06/12)12 = 5000*1.061= $ 5309

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.