6. 6: Time Value of Money: Comparing Interest Rates Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (Inow) and the effective annual rate (EAR). The Select interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for different securities is the same, then you -Select- use the APR for comparison. If the securities have different compounding periods, then the -Selectv must be used for comparison Here, M is the number of compounding periods per year and Inow/M is equal to the periodic rate (lex). If a loan or investment uses -Select compounding, then the nominal interest rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is -Select INOM Quantitative Problem: Bank i lends funds at a nominal rate of 6% with payments to be made semiannually. Bank 2 requires payments to be made quarterly, I Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Do not round Intermediate calculations. Round your answer to three decimal places Grade It Now Save & Continue Continue without saving 7. 7: Time Value of Money: Amortized Loans An important application of Select interest involves amortized loans. Some common types of amortized loans are automobile loans, home mortgage loans, and bus loans. Each loan payment consists of interest and repayment of principal. This breakdown is often developed in an amortization schedule. Interest is Select in the fil period and Select over the life of the loan, while the principal repayment is Select in the first period and it Select thereafter. Quantitative Problem: You need $15,000 to purchase a used car. Your wealthy uncle is willing to lend you the money as an amortized loan. He would like you to make ar payments for 4 years, with the first payment to be made one year from today. He requires an 8% annual return. a. What will be your annual loan payments? Do not round Intermediate calculations. Round your answer to the nearest cent. $ b. How much of your first payment will be applied to interest and to principal repayment? Do not round intermediate calculations. Round your answers to the nearest Interest: $ Principal repayment: $ Grade it Now Save & Continue Continue without saving 6. 6: Time Value of Money: Comparing Interest Rates Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (Inow) and the effective annual rate (EAR). The Select interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for different securities is the same, then you -Select- use the APR for comparison. If the securities have different compounding periods, then the -Selectv must be used for comparison Here, M is the number of compounding periods per year and Inow/M is equal to the periodic rate (lex). If a loan or investment uses -Select compounding, then the nominal interest rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is -Select INOM Quantitative Problem: Bank i lends funds at a nominal rate of 6% with payments to be made semiannually. Bank 2 requires payments to be made quarterly, I Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Do not round Intermediate calculations. Round your answer to three decimal places Grade It Now Save & Continue Continue without saving 7. 7: Time Value of Money: Amortized Loans An important application of Select interest involves amortized loans. Some common types of amortized loans are automobile loans, home mortgage loans, and bus loans. Each loan payment consists of interest and repayment of principal. This breakdown is often developed in an amortization schedule. Interest is Select in the fil period and Select over the life of the loan, while the principal repayment is Select in the first period and it Select thereafter. Quantitative Problem: You need $15,000 to purchase a used car. Your wealthy uncle is willing to lend you the money as an amortized loan. He would like you to make ar payments for 4 years, with the first payment to be made one year from today. He requires an 8% annual return. a. What will be your annual loan payments? Do not round Intermediate calculations. Round your answer to the nearest cent. $ b. How much of your first payment will be applied to interest and to principal repayment? Do not round intermediate calculations. Round your answers to the nearest Interest: $ Principal repayment: $ Grade it Now Save & Continue Continue without saving
