11. Nonannual compounding period Aa Aa The number of compounding periods in one

Question

11. Nonannual compounding period Aa Aa The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows An investor can invest money with a particular bank and earn a stated interest rate of 8.80%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer. He particularly likes his local bank because he is being offered a nominal rate of 8%. But the bank is compounding monthly. What is the effective interest rate that Rahul would pay for the loan? O 8.178% 8.30090 8.614% 8.421% O Another bank is also offering favorable terms, so Rahul decides to take a loan of $14,000 from this bank. He sign:s the loan contract at 12% compounded daily for six months. Based on a 365-day year, what is the total amount that Rahul owes the bank at the end of the loan's term? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.) O $15,385.85 O $14,865.56 O $15,460.18 $14,568.25

Explanation / Answer

1.

Nominal rate = 8.80%

Periodic rate = Nominal rate / 4 = 8.80%/4 = 2.20%

Effective rate = (1+Periodic rate)^4 - 1 = (1+2.20%)^4 - 1 = 9.09468% or 9.09%

2. Answer or correct option is > 8.300%

Effective interest rate = (1 + Nominal rate / 12)^12 - 1 = (1 + Nominal rate / 12)^12 - 1 = 8.300%

3. Answer or correct option is > $ 14,865.56

Future value or Rahul owes to bank = Loan amount x (1 + Rate/365)^(Period in years x 365)

Future value or Rahul owes to bank = 14000 x (1 + 12%/365)^(6/12 x 365)

Future value or Rahul owes to bank = ~ $ 14,865.56

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