Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The nominal interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for different securities is the same, then you can ✓use the APR for comparison. If the securities have different compounding periods, then the EAR ✓must be used for comparison. Here, M is the number of compounding periods per year and INOM/M is equal to the periodic rate (IPER). If a loan or investment uses annual ✓ compounding, then the nominal interest rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is higher than INOM- Quantitative Problem: Bank 1 lends funds at a nominal rate of 8% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Do not round intermediate calculations. Round your answer to three decimal places. %
Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The nominal interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for different securities is the same, then you can ✓use the APR for comparison. If the securities have different compounding periods, then the EAR ✓must be used for comparison. Here, M is the number of compounding periods per year and INOM/M is equal to the periodic rate (IPER). If a loan or investment uses annual ✓ compounding, then the nominal interest rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is higher than INOM- Quantitative Problem: Bank 1 lends funds at a nominal rate of 8% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Do not round intermediate calculations. Round your answer to three decimal places. %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:6. Time Value of Money: Comparing Interest Rates
Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the
difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The nominal interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for
different securities is the same, then you can ✓use the APR for comparison. If the securities have different compounding periods, then the EAR ✓must be used for comparison.
Here, M is the number of compounding periods per year and INOM/M is equal to the periodic rate (IPER). If a loan or investment uses annual ✓ compounding, then the nominal interest rate is also its effective annual rate. However, if compounding occurs
more than once a year, EAR is higher than ✓ INOM.
Quantitative Problem: Bank 1 lends funds at a nominal rate of 8% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest
rate will they charge their customers? Do not round intermediate calculations. Round your answer to three decimal places.
%
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