PLEASE SHOW SOLUTION TO SECOND PART You are considering moving your money to new

Question

PLEASE SHOW SOLUTION TO SECOND PART

You are considering moving your money to new bank offering a one-year CD that pays an 3% APR with monthly compounding. Your current bank's manager offers to match the rate you have been offered. The account at your current bank would pay interest every six months. How much interest will you need to earn every six months to match the CD? First convert APR into a monthly discount rate: The monthly discount rate is .2500 %. (Round to four decimal places.) Then compound the monthly discount rate into a 6 month interest rate: The equivalent 6-month discount rate is %. (Round to four decimal places.)

Explanation / Answer

YOU HAVE CALCULATED MONTHLY RATE CORRECT.

NOW EFFECTIVE RATE = (1 + MONTHLY RATE)NO OF MONTHS - 1

(1 +0.0025)6 -1 = 1.015094 - 1= 0.015094 = 1.5094 %

ANSWER : 1.5094%

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