K. Five banks offer nominal rates of 7% 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 $3,500 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		%		%		%		%		%
FV after 1 year
FV after 2 years

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		%		%		%		%

Suppose you don't have the $3,500 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	$		$		$		$		$

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

(more, less )_____ frequently.

-----------------------------------------------------------------

I. Suppose you borrow $16,000. The interest rate is 8%, and it requires 4 equal end-of-year payments. Set up an amortization schedule that shows the annual payments, interest payments, principal repayments, and beginning and ending loan balances. Round your answers to the nearest cent. If your answer is zero, enter "0".

	Beginning			Repayment	Ending
Year	Balance	Payment	Interest	of Principal	Balance
1
2
3
4

Choose the correct graph that shows how the payments are divided between interest and principal repayment over time.

The correct graph is

A. Repayment of Principal (\$) Interest (\$) C. B. Repayment of Principal (\$) Interest (\$)