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

Question

18. 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 8.80%; 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 8.80% 2.20% 9.09% Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer. He particularly likes his local bank because he is being offered a nominal rate of 8%. But the bank is compounding bimonthly (every two months). What is the effective interest rate that Rahul would pay for the loan? 8.58590 8.356% 8.177% 8.271% O O Another bank is also offering favorable terms, so Rahul decides to take a loan of $25,000 from this bank. He signs the loan contract at 15% compounded daily for 12 months. Based on a 365-day year, what is the total amount that Rahul owes the bank at the end of the loan's term? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.) $30,061.53 $30,206.76 $29,044.96 $30,497.21 Flash Player WIN 31,0,0,108 3 3.34.12004-2016 Aplia. All rights reserved Grade It Now Save & Continue 2013 Cengage Learning except as noted. All rights reserved

Explanation / Answer

Nominal rate = 8%

Bimonthly periodic rate = 8%/ 6 = 4%/ 3

Bimonthly periodic rate = 1.33%

Effective rate = (1 + 1.33%)6 - 1

Effective rate = 1.082714551 - 1

Effective rate = 0.082714551

Effective rate = 8.271%

Part 2:

Rate = 15%

Daily rate = 15%/ 365 = 0.041%

Present value of loan = 25,000

N = 365

Future value = 25,000 * (1 + 0.041%)365

Future value = 25,000 * 1.1617

Future value = 29,044.96

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

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