CHAPTER 6-5 - 29. The total interest paid by First Simple...

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29. The total interest paid by First Simple Bank is the interest rate per period times the number of periods. In other words, the interest by First Simple Bank paid over 10 years will be: .07(10) = .7 First Complex Bank pays compound interest, so the interest paid by this bank will be the FV factor of $1, or: (1 + r ) 10 Setting the two equal, we get: (.07)(10) = (1 + r ) 10 – 1 r = 1.7 1/10 – 1 = .0545 or 5.45% 30. Here we need to convert an EAR into interest rates for different compounding periods. Using the equation for the EAR, we get: EAR = [1 + (APR / m )] m – 1 EAR = .17 = (1 + r ) 2 – 1; r = (1.17) 1/2 – 1 = .0817 or 8.17% per six months EAR = .17 = (1 + r ) 4 – 1; r = (1.17) 1/4 – 1 = .0400 or 4.00% per quarter EAR = .17 = (1 + r ) 12 – 1; r = (1.17) 1/12 – 1 = .0132 or 1.32% per month Notice that the effective six month rate is not twice the effective quarterly rate because of the effect of compounding. 31.
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This note was uploaded on 07/15/2010 for the course FINANCE 318 taught by Professor Spurlin during the Spring '08 term at LA Tech.

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