Identify the following as either nominal or effective: (1 each) 0.5 Percentage p
ID: 2500213 • Letter: I
Question
Identify the following as either nominal or effective: (1 each) 0.5 Percentage per week, compounded weekly 1.3 Percentage per week, compounded daily 2.3 Percentage per quarter, compounded monthly 10 Percentage per year, compounded quarterly 3 Percentage per month For an interest rate of 12 Percentage per year compounded every 4 months, determine the effective interest rate per year. (6) State the rule for when to use equation 4.7. (4) Calculate the PW of a future amount of Dollar 20,000 15 years from now if the interest is 10 Percentage per year and the inflation rate is 6 Percentage per year. (5)Explanation / Answer
2A effective rate of interest = 1 + (interest / number of compunding period)number of compunding period)-1
= (1 + 0.12 / 3)3 - 1
= (1.04)4 - 1
= 1.1249-1
= 0.1249
Effective rate = 12.49%
3. Future value = principal( 1 + annual interest rate/ number of times compunded)compoundind period * years
20000 = Principal ( 1 + 0.16/1)1* 15
Principal = 20000 / ( 1 + 0.16/1)1* 15
principal = 20000 / 9.266
Principal = $2158.43
Note:- Nominal interest rate - inflation = real interest rate
Nominal interest rate = real interest rate + inflatiion
= 10 + 6
= 16%