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Interest calculation and Cash-Flow

Question 1: Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.

Now, suppose on July 1st you deposit $10,000 in an account that pays a nominal, or quoted, interest rate of 11.33463 percent, with interest added (compounded) daily.
The calculation in this case is based on one year with 365 days.

How much will you have in your account on October 1st, in 92 days or after 3 months?

Question 2: What is free case flow? Why is it the most important measure of cash flow?

Solution Preview

Question 1: Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
I would rather have a savings account that pays 5% interest compounded daily due to the compounding effect. Whenever payments occur more frequently than once a year, the interest will compound higher. We can find it through the calculation of effective annual rate as follows: -
5% interest compounded semiannually
Effective annual rate = (1 + inom/m)m - 1 where inom is the nominal interest rate, and m is the number of compounding periods per ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to find the interest and free cash flow.

$2.19