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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 Spring '08
 Dr.Kalim
 Effective Interest Rate

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