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)
To determine:
The equivalent discount rate for six months.
Introduction:
The discount rate is the interest rate that is charged to depository institutions and commercial banks for the loan received. The discount rate is used to calculate the present value of future cash flows.
Answer to Problem 1P
The equivalent discount rate for six months is 4.66%.
Explanation of Solution
Given information:
A bank offers Person X an account that pays 20% interest rate in total for a two-year deposit.
Formula to compute the equivalent discount rate:
Here
r = rate of interest.
n = number of years.
Hence, the equivalent discount rate for six months is 0.0466 or 4.66%.
b)
To determine:
The equivalent discount rate for one year.
Answer to Problem 1P
The equivalent rate for one year is 9.54%.
Explanation of Solution
Given information:
A bank offers Person X an account that pays 20% interest rate in total for a two-year deposit.
Formula to compute the equivalent discount rate:
Here
r = rate of interest.
n = number of years.
Hence, the equivalent discount rate for one year is 0.0954 or 9.54%.
c)
To determine:
The equivalent discount rate for one month.
Answer to Problem 1P
The equivalent discount rate for one month is 0.761%.
Explanation of Solution
Given information:
A bank offers Person X an account that pays 20% interest rate in total for a two-year deposit.
Formula to compute the equivalent discount rate:
Here
r = rate of interest.
n = number of years.
Hence, the equivalent discount rate for one month is 0.00761 or 0.761%.
Want to see more full solutions like this?
Chapter 5 Solutions
EBK CORPORATE FINANCE
- The final payment will be $______ (Round to the nearest cent.) 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 the following: a. Six months b. One year c. One month (Note: Be careful not to round any intermediate steps less than six decimal places.) a. Six months The equivalent discount rate for a period length of six months is _____%. (Round to two decimal places.) Part 2 b. One year The equivalent discount rate for a period length of one year is _____%. (Round to two decimal places.) Part 3 c. One month The equivalent discount rate for a period length of one month is ______%. (Round to three decimal places.)arrow_forwardif you deposit 55,650 in a bank at 12% interest for a period of ten years what will be the feuture value?arrow_forwardFind the monthly payment for a bank loan. (Round your answer to the nearest cent.) $100 loan for 12 months at 12%arrow_forward
- If the bank states an effective interest rate of 13.5% per year, and there are 52.15 weeks, how much interest do you earn on a deposit of $120,000 over 1 week?arrow_forwardyou recieve a credit card offer that charges interest at 1.75% per month compounded monthly. What is the nominal annual interest rate?arrow_forwardcompute the initial value of the money if the borrower needs deposit the accumulated amount of 59,137 to the bank after 8 months and 24 days if the money has the interest rate of 19% per annum.arrow_forward
- Suppose you have received a credit card offerfrom a bank that charges interest at 1.4% per month,compounded monthly. What is the nominal interest(annual percentage) rate for this credit card? What isthe effective annual interest rate?arrow_forwardAssume you have secured a loan of $10,000 from a bank which will be paid in one year. The bank has offered you $850 monthly installments, which equates to a 3.67% annualized interest rate. The monthly interest rate of 0.31% is the annual rate divided by 12. You know that the interest is paid at the end of the period, so you can multiply the opening balance by the monthly interest rate to get the interest paid. What is the interest rate to be paid for the month of October? Month Payment Interest Principal Opening Balance Closing Balance January $850.00 $10,000.00 February $850.00 March $850.00 April $850.00 May $850.00 June $850.00 July $850.00 August $850.00 September $850.00 October $850.00 November $850.00 December $850.00 Monthly Rate 0.31% Annual Rate 3.67% Total Interest Paid Group of answer choices a. 2.25…arrow_forwardAssume you have secured a loan of $10,000 from a bank which will be paid in one year. The bank has offered you $850 monthly installments, which equates to a 3.67% annualized interest rate. The monthly interest rate of 0.31% is the annual rate divided by 12. You know that the interest is paid at the end of the period, so you can multiply the opening balance by the monthly interest rate to get the interest paid. What is the interest rate to be paid for the month of October? Month Payment Interest Principal Opening Balance Closing Balance January $850.00 $10,000.00 February $850.00 March $850.00 April $850.00 May $850.00 June $850.00 July $850.00 August $850.00 September $850.00 October $850.00 November $850.00 December $850.00 Monthly Rate 0.31% Annual Rate 3.67% Total Interest Paid CHOICES: A.10.32B.…arrow_forward
- You can earn $41 in interest on a $1,000 deposit for eight months. If the EAR is the same regardless of the length of the investment, how much interest will you earn on a $1,000 deposit for: a. 8 months. b. 1 year. с. 1.3 years. a. 8-months. For a 8-month, $1,000 deposit you will earn $ (Round to the nearest cent).arrow_forwardYour bank account pays a nominal interest rate of 8%, compounded quarterly. You deposit $500 in the account today, and deposit $1,000 in the account at the end of the first year. How much will you have in the account at the end of the first year?arrow_forwardyour credit card has a balance of $3000 in an annual interest rate of 17% with no further purchase charge to the card and the balance being paid off over five years. The monthly payment is $75 and the total interest paid is $1500. You can get a bank loan at 9.5% with a term of six years complete parts, a and B below. A. How much will you pay each month? How does this compare with the credit card payment each month? A. the monthly payment for the bank loan are approximately $__ This is $__ more than a monthly credit card payments. B. The monthly payments are the bank loan are approximately $__ This is $__ less than the monthly credit card payments. B.How much total interest will you pay? How does this compare with the total credit-card interest? A. The total interest paid over 3 years for the bank loan is approximately$__. This is $__ more than the total credit-card interest. B. The total interest paid over 3 years for the bank loan is approximately $__. This is $__ less than the…arrow_forward
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning