Suppose the inflation rate is compounded annually at 3% APR. Do you prefer compounded semiannually at 5% APR nominal interest rate or compounded quarterly at 2% real interest rate?
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A: so i=1.15/1.07=1.0747663 =7.47663%
Suppose the inflation rate is compounded annually at 3% APR. Do you prefer compounded semiannually at 5% APR nominal interest rate or compounded quarterly at 2% real interest rate?
Step by step
Solved in 3 steps
- (1) What is the value at the end of Year 3 of the following cash flow stream if the quoted interest rate is 10%, compounded semiannually? (2) What is the PV of the same stream? (3) Is the stream an annuity? (4) An important rule is that you should never show a nominal rate on a time line or use it in calculations unless what condition holds? (Hint: Think of annual compounding, when INOM = EFF% = IPER.) What would be wrong with your answers to parts (1) and (2) if you used the nominal rate of 10% rather than the periodic rate, INOM/2 = 10%/2 = 5%?The discount factor corresponding to a 3-year continuously compounded interest rate is 0.765667. What is the corresponding continuously compounded interest rate? What is the corresponding quarterly compounded interest rate expressed at an annual rate?The annual inflation rate is expected to be 4.78% and the nominal (annual) interest rate is 5.75%. What is the real interest rate?
- A certain nominal annual interest rate has an effective rate of 19.722% when compounded continuously. What is its effective rate if compounded bi-monthly? A. 19.87% B. 18.45% C 18% D. 19.41%Suppose the actual inflation rate is 2% over the next year. Once the loan has been repaid, what is the nominal rate of interest and real rate of interest?Suppose that you borrow $60,000 at 9% compounded monthly over five years. Knowing that the 9% represents the market interest rate, you compute the monthly payment in actual dollars as $1,245.51. If the average monthly general inflation rate is expected to be 0.25%, determine the equivalent equal monthly payment series in constant dollars.
- Suppose that you borrow $42,500 at 11.4%compounded monthly over seven years. Knowingthat the 11.4% represents the market interest rate, yourealize that the monthly payment in actual dollars willbe $736.67. If the average monthly general inflationrate is expected to be 0.6%, determine the equivalentequal monthly payment series in constant dollars.If the stated annual rate of interest compounded semi-annually is 12.5% then what is the equivalent monthly rate compounded monthly?If the compounding frequency is monthly and the discount factor=0.62026, what is the value of the corresponding annual interest rate? What is the corresponding continuous compounding annual interest rate if the discount factor remains at 0.62026?
- Suppose that an investment promises to pay a real 9% annual rate of interest and inflation rate is 3%. What is the effective annual interest rate on this investment assuming that interest is compounded quarterly?Assume the nominal interest rate is 12 percent and the expected rate of inflation is 8 percent. Calculate real rate of interest. Now assume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 2 percent. Calculate the real rate of interest. Assume the expected rate of inflation is 6 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?A nominal interest rate of 11.333%, continuously compounded, yields an effective annual interest rate of how much?
