EGM-Q05-soln

EGM-Q05-soln - Solution EGM 320 - Quiz # 5 Spring 2008...

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Solution – EGM – 320 - Quiz # 5 – Spring 2008 Solution 1) Interest tables in Appendix are based on time periods that may be annually, quarterly, monthly, so on. Because we have no 1.375% tables (or 16.5% tables), the effective interest rate equation must be used to compute the effective rate of interest, i a = (1+ 0.165/12) 12 =0.1781, or 17.81%/year. Note that r = 12(1.375%) = 16.5%, which is the APR. It is true that i = M(r/M) where r/M is the interest rate per period. Answer C Solution 2) There are four compounding periods per year, or a total of 4 x 10 = 40 interest periods. The interest rate per interest period is 6%/4 = 1.5%. When the values are used, one finds that F = P (F/P, 1.5%, 40) = $100.00(1.015) 40 = $100.00(1.814) = $181.40. Alternatively, the using the effective interest rate equation, the effective interest rate is i a = 6.14%. Therefore, F = P(F /P, 6.14%, 10) = $100.00(1.0614) 10 = $181.40. Answer A Solution 3) The number of installment payments is 5 x 12 = 60, and the interest rate per month is 12%/12 = 1%. When these values are used in effective interest rate equation, one finds that A = P (A/P, 1%, 60) = $10,000(0.0222) = $222. Notice that there is a cash flow at the end of each month (interest period), including the
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EGM-Q05-soln - Solution EGM 320 - Quiz # 5 Spring 2008...

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