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d Chrome File Edit View History Bookmarks People Window Help Search Textbook Sok × More On The AFN (AX age xy?? MindTap-Cengage L × ing.cengage.com/static/nbjui/lindex.html?nbld-8245728nbNodeld 317510246&eISBN-9781305; f+ C https: 5% MINDTAP FIN 331 AOL FINAL REVIEW Due Tomorrow at 4 PM COT 3. Nonannual compounding period 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 'an invest money with a particular bank and earn a stated interest rate of 6.60%; however, interest wil 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 You want to invest $11,000 and are looking for safe investment options. Your bank is offering you a certificate of deposit that pays a nominal rate of 6% that is compounded monthly, what is the effective rate of return that you will earn from this investment? 6.351 % o 6.168% 6.289% 6.482% Suppose you decide to deposit $11,000 in a savings account that pays a nominal rate of 11%, but interest is compounded daily. Based on a 365-day year, how much would you have in the account after 12 months? (Hint: To calculate the number of days, divide the number of months by 12 and mutiply by 365.) O $12,033.28 O $12,770.01 O $13,015.59 $12,278.86Explanation / Answer
a.
Effective rate of return for monthly compounding = (1+Rate/12)^12 -1
= (1+6%/12)^12 -1
= 6.17%
b. Correct option is > $12,278.86
PV = Present value = $11000
Rate = 11%
m = Compounding frequency = 365
n = year(s) = 1
FV = ?
Formula for FV:
FV = PV x (1+R/m)^(m x n)
FV = 11000 x (1+11%/365)^(365 x 1)
FV = $12,278.86
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