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Banks routinely borrow money among themselves overnight, in order to cover their transactions during the day. The interest rate paid on these one-day loans is
Banks routinely borrow money among themselves overnight, in order to cover their transactions during the day. The interest rate paid on these one-day loans is called theovernight rateand therefore is a nominal rate of interest compounded daily,j365.
If the ABC Bank borrows $20 000 000 for one day at a rate ofj365= 4%,
- Calculate the interest payment on the one-day loan.
- Calculate the interest payment if the rate had been 4% compounded continuously.
- If ABC borrowed $25 000 000 and paid back $25 002 568 the next day, what effective rate of interest,j, was it charged?
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