359 PM 22 QUESTION 2 A bank offers to pay 16020 at the end

3:59 PM * 22% QUESTION 2 A bank offers to pay $16,020 at the end of a CD\'s 6-month term if purchased for $15,000. What nominal annual interest rate is the bank offering? QUESTION 3 What is the effective annual interest rate being offered by the bank in the previous problem? QUESTION 4 Which of the following interest rates would produce higher returns on a yearly basis? 0A238% compounded annually B. 2 1/4% compounded quarterly °C.21/4 % compounded monthly D2 1/8 compounded continuously QUESTION 5 Sarah is investing in a 6-year fund with a semiannual interest rate of 3%. What is the nominal (annual) interest rate of the fund?

Solution

SOLUTION:-

GIVEN DATA:-

SEMI ANNUAL INTEREST RATE= 3%

THEREFORE THE VALUE WHICH WILL INCREASE IN ONE SEMI- ANNUAL PERIOD= (1+ 0.03/2)= 1.015

SIMILIARLY FOR ONE YEAR ,VALUE= (1+ 0.03/2)*( 1+0.03/2) = (1+0.03/2)² = 1.030225

THEREFORE INCREASED VALUE FROM INITIAL VALUE= 1.030225-1 = 0.030225

CONVERTING THE ABOVE IN PERCENTAGE, WE HAVE NOMINAL ( ANNUAL) INTEREST RATE = 0.030225*100= 3.0225%