11. Nonannual compounding period Aa Aa The number of compounding periods in one

Question

11. Nonannual compounding period Aa Aa The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows An investor can invest money with a particular bank and earn a stated interest rate of 15.40%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate You want to invest $22,000 and are looking for safe investment options. Your bank is offering you a certificate of deposit that pays a nominal rate of 14% that is compounded semiannually. What is the effective rate of return that you will earn from this investment? 0 14.67396 O 1457596 0 14.61196 14.49096 Suppose you decide to deposit $22,000 in a savings account that pays a nominal rate of 4%, but interest is compounded daily. Based on a 365-day year, how much would you have in the account after three months? (Hint To calculate the number of days, divide the number of months by 12 and multiply by 365.) O $22,665.63 $21,776.79

Explanation / Answer

We have 15.4% interest rate compounded quarterly Number of compounding in a year = 4 Nominal interest rate = Interest rate with a specified compounding period which shows the number of times interest is compounded per annum Nominal interest rate = 15.40% Periodic rate = nominal interest rate / Number of compounding per annum =15.4%/4 3.85% Effective annual rate = is effective interest rate per annum after incorporating effect of compounding in a interest rate Quarterly rate = =15.4%/4 3.85% Effective annual rate = (1+3.85%)^4-1 16.31% answer q -2 investment 22000 Nominal rate 14% Compounded semiannually Effective rate ? Semiannual rate = =14%/2 7.00% Effective annual rate = (1+7%)^2-1 14.49% answer q -3 investment 22000 Nominal rate 4% Compounded daily Effective interest rate = =(1+4%/365)^365-1 4.08% Amount after 3 month= =22000*(1+4.0808%)^(91.25/365)        22,221 Correct answer is not in list please check there answer should be 22,221 answer q -4 investment 22000 Nominal rate 14% Compounded semiannually Effective rate ? Semiannual rate = =14%/2 7.00% Effective annual rate = (1+7%)^2-1 14.49% answer q -5 investment 22000 Nominal rate 4% Compounded daily Effective interest rate = =(1+4%/365)^365-1 4.08%

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