Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
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Chapter 5, Problem 1P

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

  1. a. Six months.
  2. b. One year.
  3. c. One month.

a)

Expert Solution
Check Mark
Summary Introduction

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:

Equivalent discount rate = (1+r)n1

Here

r = rate of interest.

n = number of years.

Equivalent discount rate = (1+r)n1=(1+0.2)141=1.04661=0.0466

Hence, the equivalent discount rate for six months is 0.0466 or 4.66%.

b)

Expert Solution
Check Mark
Summary Introduction

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:

Equivalent discount rate = (1+r)n1

Here

r = rate of interest.

n = number of years.

Equivalent discount rate = (1+r)n1=(1+0.2)121=1.09541=0.0954

Hence, the equivalent discount rate for one year is 0.0954 or 9.54%.

c)

Expert Solution
Check Mark
Summary Introduction

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:

Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book, Chapter 5, Problem 1P Equivalent discount rate = (1+r)n1

Here

r = rate of interest.

n = number of years.

Equivalent discount rate = (1+r)n1=(1+0.2)1241=1.007611=0.00761

Hence, the equivalent discount rate for one month is 0.00761 or 0.761%.

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Students have asked these similar questions
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 1 year, 6 months, & 1 year?
3. Your bank is offering you an account that will pay 10% interest in total for a two-yeardeposit. Determine the equivalent discount rate for a period length of:a. Six months.b. One year.
The final payment will be $______ (Round to the nearest cent.) 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 the following: a. Six months b. One year c. One month (Note: Be careful not to round any intermediate steps less than six decimal places.) a. Six months The equivalent discount rate for a period length of six months is _____%. (Round to two decimal places.) Part 2 b. One year The equivalent discount rate for a period length of one year is _____%. (Round to two decimal places.) Part 3 c. One month The equivalent discount rate for a period length of one month is ______%. (Round to three decimal places.)

Chapter 5 Solutions

Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

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