6. Time Value of Money: Comparing Interest RatesDifferent compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, weneed 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 effectiveannual rate (EAR). The -Select- interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compoundingperiods for different securities is the same, then you -Select- use the APR for comparison. If the securities have different compounding periods, then the -Select-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 -Select-the nominal interest rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is -Select- INOM.Quantitative Problem: Bank 1 lends funds at a nominal rate of 9% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank2 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.%olocompounding, then

Information Provided: Bank 1 Rate = 9% compounded semi-annually Bank 2 Rate Compounding = Quarterly…

Quantitative Problem: Bank 1 lends funds at a nominal rate of 9% 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.

Quantitative Problem: Bank 1 lends funds at a nominal rate of 9% 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

See similar textbooks

Similar questions

A bank is currently offering a savings account paying an interest rate of 6.0 percent compounded quarterly. It would like to offer another account ,with the same effective annual rate ,but compounded monthly. What is the equivalent rate of compound monthly.?
The York Company has arranged a line of credit that allows it to borrow up to $45 milion at any time. The interest rate is .621 percent per month. Additionally, the company must deposit 3 percent of the amount borrowed in a non-interest bearing account. The bank uses compound interest on its line-of-credit loans. What is the effective annual rate on this line of credit? Multiple Choices 6.40% 7.71% 7.95% 7.06% 8.83%
Hi, I need help with the following questions. Thank you! 1) Handley Bank advertises that its standard lending rate is 12% per annum compounding monthly. Which of the following rates represent effective rates that are consistent with the Handley Bank quoted rate (to two decimal places)? Group of answer choices A) 12.68% per annum compounding annually B) None of the other options are correct C) More than one of the other options are correct D) 3.00 % per quarter compounding quarterly E) 1.00 % per month compounding monthly
Complete the following table: (Use Table 15.1.) (Do not round intermediate calculations. Round your answers to the nearest cent.) First Payment Broken Down Into— Selling price Down payment Amount mortgage Rate Years Monthly payment Interest Principal Balance at end of month $221,000 $44,200 7.00 % 15
Ricky Ripov’s Pawn Shop charges an interest rate of 18.25 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers. a. What rate should the shop report? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the effective annual rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
A bank offers your firm a revolving credit arrangement for up to $86 million at an interest rate of 2.15 percent per quarter. The bank also requires you to maintain a compensating balance of 2 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.50 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate % b. What is your effective annual interest rate on the lending arrangement if you borrow $50 million immediately and repay it in one year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2…
Suppose your credit card issuer states that it charges a 19.25% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate? a. 21.04% b. 19.25% c. 20.18% d. 20.68% e. 20.51%
Suppose that $2500 is placed in a savings account at an annual rate of 4.2%, compounded monthly. Assuming that no withdrawals are made, how long will it take for the account to grow to $4000? Do not round any intermediate computations, and round your answer to the nearest hundredth. I necessary, refer to the list.of finandial formulas O ears
Determine the annual financing cost of a 1-year (365 day), $9,000 discounted bank loan at a stated annual interest rate of 10.0 percent. Assume that no compensating balance is required. Round your answer to two decimal places. %
Label all final answers with the correct units, if applicable. Unless otherwise stated, use 4 decimal places for intermediate computations of interest rates (if needed) then round off final answers to two decimal places. For monetary amounts, use 2 decimal places even for intermediate computations. 1. If P5,000 is invested in a time-deposit for 2 years in a bank that offers 4% annual interest compounded quarterly, how much interest will be earned at the end of 2 years?
Complete the following table: (Use Table 15.1.) Note: Do not round intermediate calculations. Round your answers to the nearest cent. selling price down payment amount mortgage rate years monthly payment first payment broken down into interest first payment broken down into principal Balance at end of month $236,000 47,200 $188,800 7.00% 15 Monthly payment is NOT 1694.23 first payment broken down into interest is NOT 1,101.23 first payment principal is NOT 592.90 balance at end is NOT 188,207.10 TABLE 15.1 Amortization table (mortgage principal and interest per $1,000) Rate Interest Only 10 Year 15 Year 20 Year 25 Year 30 Year 40 Year 2.000 0.16667 9.20135 6.43509 5.05883 4.23854 3.69619 3.02826 2.125 0.17708 9.25743 6.49281 5.11825 4.29966 3.75902 3.09444 2.250 0.18750 9.31374 6.55085 5.17808 4.36131 3.82246 3.16142 2.375 0.19792 9.37026 6.60921 5.23834 4.42348 3.88653 3.22921 2.500 0.20833 9.42699 6.66789 5.29903 4.48617 3.95121 3.29778 2.625…
Big Dom’s Pawn Shop charges an interest rate of 26.8 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. a. What rate should the shop report? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) b. What is the effective annual rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS