Visteon, a spin off company of Ford Motor Company, supplies major automobile com
ID: 1093639 • Letter: V
Question
Visteon, a spin off company of Ford Motor Company, supplies major automobile components to auto manufacturers worldwide and is Ford's largest supplier. An engineer is on a Visteon committee to evaluate bids for new-generation coordinate-measuring machinery to be directly linked to the automated manufactuing of high precision components. The following are three interest rates that are included in the Vendor bids. The engineer is confused and wants to compare the effective interest rates on a quarterly and semiannually basis. (NOTE: Assume 4 weeks per month).
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BID #1: 10% per year, compounded quarterly
BID #2: 2.4% per quarter, compounded weekly
BID #3: 9.45% per year, compounded monthly
a). Calculate the effective QUARTERLY interest rate for ALL three bids.
b). Calculate the effective SEMIANNUAL interest rate for ALL three bids.
*****I have no idea what the actual answer is: could you show how you get the rates? I WILL RATE AND COMMENT!! Thanks!******
Explanation / Answer
a)
BID1
EAR = (1+0.1/4)^4 - 1 = 10.38%
effective quaterly interest rate = EAR/number of periods per year
= 10.38%/4 = 2.60%
BID2:
APR = 4 * 2.24 = 9.6%
EAR = (1+ 0.096/52)^52 -1 = 10.07%
effective quaterly interest rate = 10.07%/4 =2.52%
BID3:
EAR = (1+0.0945/12)^12 -1 = 9.87%
effective quaterly interest rate = 9.87%/4 =2.47%
b) effective semmiannual interest rate = EAR/2
BID1 = 10.38%/2 = 5.19%
BID2 = 10.07%/2 = 5.035%
BID3 = 9.87%/2 = 4.935%
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