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Question 4

Part A

Effective versus nominal interest rates

Bank A pays 6% interest compounded annually on deposits, while Bank B pays 5.5% compounded daily.

Based on the EAR (or EFF%), which bank should you use?

Option 1: You would choose Bank A because its EAR is higher.

Option 2:You would choose Bank B because its EAR is higher.

Option 3:You would choose Bank A because its nominal interest rate is higher.

Option 4:You would choose Bank B because its nominal interest rate is higher.

Option 5:You are indifferent between the banks and your decision will be based upon which one offers you a gift for opening an account.

Which option is correct________

Part B

Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest

Option 1: If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable.

Option 2: If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you have no intentions of making a withdrawal during the year, then Bank B might be preferable.

Option 3: If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable.

Option 4: If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable.

Option 5: If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable.

Which option is correct________

Question 5

Part A

You have $62,680.21 in a brokerage account, and you plan to deposit an additional $3,000 at the end of every future year until your account totals $280,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal? Round your answer to two decimal places at the end of the calculations.

_________Years

Part B

Effective rate of interest

Find the interest rates earned on each of the following. Round each answer to two decimal places.

i) You borrow $700 and promise to pay back $791 at the end of 1 year. ____________%

ii) You lend $700 and the borrower promises to pay you $791 at the end of 1 year. _____________ %

iii)You borrow $69,000 and promise to pay back $195,010 at the end of 7 years. ______________ %

iv) You borrow $18,000 and promise to make payments of $4,390.00 at the end of each year for 5 years.

___________%