Chapter 5: interest rates
Chapter 5 : Interet rates
Page161
Interest rate quotes and adjustments
5-1. 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. Since 6 months is [pic] of 2 years, using our rule [pic]
So the equivalent 6 month rate is 4.66%.
b. Since one year is half of 2 years [pic]
So the equivalent 1 year rate is 9.54%.
c. Since one month is [pic] of 2 years, using our rule [pic]
So the equivalent 1 month rate is 0.763%.
5-2. Which do you prefer: a bank account that pays 5% per year (EAR) for three years or
a. An account that pays 2[pic] every six months for three years?
b. An account that pays 7[pic] every 18 months for three years?
c. An account that pays [pic] per month for three years?
If you deposit $1 into a bank account that pays 5% per year for 3 years you will have [pic] after 3 years.
a. If the account pays [pic] per 6 months then you will have [pic] after 3 years, so you prefer [pic] every 6 months.
b. If the account pays [pic] per 18 months then you will have [pic] after 3 years, so you prefer 5% per year.
c. If the account pays [pic] per month then you will have [pic] after 3 years, so you prefer [pic] every month.
5-3. Many academic institutions offer a sabbatical policy. Every seven years a professor is given a year free of teaching and other administrative responsibilities at full pay. For a professor earning $70,000 per year who works for a total of 42 years, what is the present value of the amount she will earn while on sabbatical if the interest rate is 6% (EAR)?
Timeline:
|0 |7 |14 | | | |42 |
| | | | | | | |
|0 |1... [continues]
5-4) 10% APR compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice.
(Assume there are 365 days in the year.)
1. 10% APR rate
Page161
Interest rate quotes and adjustments
5-1. 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. Since 6 months is [pic] of 2 years, using our rule [pic]
So the equivalent 6 month rate is 4.66%.
b. Since one year is half of 2 years [pic]
So the equivalent 1 year rate is 9.54%.
c. Since one month is [pic] of 2 years, using our rule [pic]
So the equivalent 1 month rate is 0.763%.
5-2. Which do you prefer: a bank account that pays 5% per year (EAR) for three years or
a. An account that pays 2[pic] every six months for three years?
b. An account that pays 7[pic] every 18 months for three years?
c. An account that pays [pic] per month for three years?
If you deposit $1 into a bank account that pays 5% per year for 3 years you will have [pic] after 3 years.
a. If the account pays [pic] per 6 months then you will have [pic] after 3 years, so you prefer [pic] every 6 months.
b. If the account pays [pic] per 18 months then you will have [pic] after 3 years, so you prefer 5% per year.
c. If the account pays [pic] per month then you will have [pic] after 3 years, so you prefer [pic] every month.
5-3. Many academic institutions offer a sabbatical policy. Every seven years a professor is given a year free of teaching and other administrative responsibilities at full pay. For a professor earning $70,000 per year who works for a total of 42 years, what is the present value of the amount she will earn while on sabbatical if the interest rate is 6% (EAR)?
Timeline:
|0 |7 |14 | | | |42 |
| | | | | | | |
|0 |1... [continues]
5-4) 10% APR compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice.
(Assume there are 365 days in the year.)
1. 10% APR rate