Question
Five banks offer nominal rates of 4% on deposits, but A pays interest annually, B pays semiannually, C pays quarterly, D pays monthly, and E
Five banks offer nominal rates of 4% on deposits, but A pays interest annually, B pays semiannually, C pays quarterly, D pays monthly, and E pays daily. Assume 365 days in a year.
What effective annual rate does each bank pay? If you deposit $4,000 in each bank today, how much will you have in each bank at the end of 1 year? 2 years? Round your answers to two decimal places.
A | B | C | D | E | ||||||
EAR | fill in the blank 35 | % | fill in the blank 36 | % | fill in the blank 37 | % | fill in the blank 38 | % | fill in the blank 39 | % |
FV after 1 year | $ fill in the blank 40 | $ fill in the blank 41 | $ fill in the blank 42 | $ fill in the blank 43 | $ fill in the blank 44 | |||||
FV after 2 years | $ fill in the blank 45 | $ fill in the blank 46 | $ fill in the blank 47 | $ fill in the blank 48 | $ fill in the blank 49 |
If the TVM is the only consideration, what nominal rate will cause all of the banks to provide the same effective annual rate as Bank A? Round your answers to two decimal places.
B | C | D | E | |||||
Nominal rate | fill in the blank 50 | % | fill in the blank 51 | % | fill in the blank 52 | % | fill in the blank 53 | % |
Suppose you don't have the $4,000 but need it at the end of 1 year. You plan to make a series of deposits annually for A, semiannually for B, quarterly for C, monthly for D, and daily for E with payments beginning today. How large must the payments be to each bank? Round your answers to the nearest cent.
A | B | C | D | E | ||||||
Payment | $ fill in the blank 54 | $ fill in the blank 55 | $ fill in the blank 56 | $ fill in the blank 57 | $ fill in the blank 58 |
Even if the five banks provided the same effective annual rate, would a rational investor be indifferent between the banks?
It is more likely that an investor would prefer the bank that compounded
moreless frequently.
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