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Your bank is offering you an account that will pay 20% interest in total for a two-year deposit. Determine the equivalent discount rate for a period length of
- a. Six months.
- b. One year.
- c. One month.
a)
To determine:
The equivalent discount rate for six months.
Introduction:
The discount rate is the interest rate that is charged to depository institutions and commercial banks for the loan received. The discount rate is used to calculate the present value of future cash flows.
Answer to Problem 1P
The equivalent discount rate for six months is 4.66%.
Explanation of Solution
Given information:
A bank offers Person X an account that pays 20% interest rate in total for a two-year deposit.
Formula to compute the equivalent discount rate:
Here
r = rate of interest.
n = number of years.
Hence, the equivalent discount rate for six months is 0.0466 or 4.66%.
b)
To determine:
The equivalent discount rate for one year.
Answer to Problem 1P
The equivalent rate for one year is 9.54%.
Explanation of Solution
Given information:
A bank offers Person X an account that pays 20% interest rate in total for a two-year deposit.
Formula to compute the equivalent discount rate:
Here
r = rate of interest.
n = number of years.
Hence, the equivalent discount rate for one year is 0.0954 or 9.54%.
c)
To determine:
The equivalent discount rate for one month.
Answer to Problem 1P
The equivalent discount rate for one month is 0.761%.
Explanation of Solution
Given information:
A bank offers Person X an account that pays 20% interest rate in total for a two-year deposit.
Formula to compute the equivalent discount rate:
Here
r = rate of interest.
n = number of years.
Hence, the equivalent discount rate for one month is 0.00761 or 0.761%.
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Chapter 5 Solutions
Corporate Finance
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