FINC19011 – BUSINESS FINANCE-Wk02-2

Egears effective annual rate cyclone rentals borrowed

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Unformatted text preview: effective annual rate (EAR) • Effective annual interest rate (EAR) defined as annual growth rate that takes compounding into account • The effective annual interest Calculating the effective annual rate (EAR) rate EAR = (1 + Quoted rate/m)m – 1 - m is the # of compounding periods during a year • EAR conversion formula accounts for number of compounding periods, thus effectively adjusts annualised interest rate for time value of money • EAR is the true cost borrowing and lending. e.g. EARs • Effective annual rate: Cyclone Rentals borrowed $15,550 from a bank for 3 years. If the quoted rate (APR) is 6.75 per cent, and the compounding is daily, what is the effective annual rate (EAR)? m i 0.0675 EAR = 1 + − 1 = 1 + m 365 = 1.0698 − 1 = 6.98% 365 −1 Slide 46 Few More Maths on Annuity Calculating annuity PMT • Brian is a Year 9 student. He plans to buy a car in 4 years. He estimates that the car will cost him $22,000 in 4 years. How much money should Brian save each year if he wants to buy the car? Assume his savings account earns 5.65 per cent annually. m =1 (1 + i )n − 1 FVAn = CF × i 22,000 = CF × 4.351949362 1.05654 − 1 22,000 = CF × 0.0565 22,000 CF = = $5,055 .21 4.351949362 Slide 48 e.g. Calculating annuity n Christine wants to accumulate $247,609.95 so that she can purchase an apartment. She plans to invest $25,000 at the end of each year. If Christine's savings earn 11.4% p.a., how long will it take for her to reach her goal? m=1 (1 + i )n − 1 FVAn = CF × i 1.114n − 1 247,609.95 = 25,000 × 0.114 247,609.95 1.114n − 1 = 25,000 0.114 1.114 n − 1 9.904398 = 0.114 9.904398 × 0.114 = 1.114 n − 1 1.129101372 + 1 = 1.114n 2.129101372 = 1.114 n l og 2.129101372 = n × log1.114 0.328196339 = n = 7 years Slide 0.04688519 49 0.328196339 = n × 0.04688519 WORKSHOP & OTHER ACTIVITIES Workshop Questions & Problems Chapter 6 ­ Parrino et. al. 2014 Critical Thinking Questions 6.3, 6.4, 6.8, 6.9 Numerical Problems: 6.1, 6.2, 6.4, 6.5, 6.7, 6.9, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.18, 6.19, 6.21, 6.22, 6.23, 6.25, 6.27, 6.29, 6.31, 6.35...
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This document was uploaded on 03/27/2014.

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