chapter 5_sol. - Solution ( Chapter 5) 4. This example...

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Solution ( Chapter 5) 4. This example illustrates the cost associated with having to maintain a high minimum balance in order to earn interest on checking. The forced balance is the amount of money held in the account above what is necessary to pay monthly expenses. $2,500 – $1,300 = $1,200 Forced balance $1,200 x 3.25% = $39.00 Forgone interest $2,500 x 1.00% = $25.00 Interest earned on checking account $25.00 – $39.00 = -$14.00 Interest earned minus opportunity cost The opportunity cost is the foregone interest that could have been earned at a higher rate on the forced balance. In this example, $14.00 more could have been earned in an alternative account. 5. 16.66% Annual Percentage Rate = ($400 / $9,600) x 4* $10,000.00 Value at maturity – $9,600 .00 Discounted purchase price $400.00 Total interest earned * This is 4 because the example was a 3-month T-bill; therefore an investor could do this four times per year. This rate also ignores the effects of compounding. 6.
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chapter 5_sol. - Solution ( Chapter 5) 4. This example...

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