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A credit card account charges 20% as a nominal annual interest rate compounded monthly.

1. A credit card account charges 20% as a nominal annual interest rate compounded monthly. What is the effective annual rate being charged on the unpaid purchase balance if the cardholder makes no payment?
a. 21.55%
b. 21.94%
c. 0.2002%
d. 18.37%

2. You invest $1,000 in a account that earns a nominal annual rate of 10%. How much additional interest would you receive if this account earned interest quarterly at 2.5%
a. 2.5
b. 3.81
c. 5.06
d. 5.17

3. Your firm must pay a debt obligation of $5,000 in two years. You want to invest $4,000 today to cover this obligation. Using annual compounding, what rate of return will be necessary if this initial amount is to cover the obligation two years from now?
a. 11.47%
b. 11.21%
c. 11.80%
d. 11.31%

4. You have just won $2 millions in the lottery. You are offered a choice of receiving the whole amount in three year or $1.6 millions today. At what annual rate have you winning been discounted?
a.7.72%
b.7.58%
c.7.46%
d.7.51%

5. You decide to put $1,000 into a saving account at your local bank. This account earns a nominal annual rate of 8%, but compounds interest quarterly at the rate of 2%. If all interest payments are reinvested in the same accounts, what will be your balance in ten years?
a. 2,208.04
b. 2,219.64
c. 1,800.00
d. 1,218.99

6. You need $10,000 three years from today. You have decided to put funds in an account that earns a nominal rate of 12%, compounded semiannually. How much do you need to place in account today to have the required amount in three years?
a. 7,117.80
b. 8,396.19
c. 7,049.61
d. 5,066.31

7. A bank offers you the choice of two CDs: CD1 compounded interest annually, and offers a nominal rate of 10%. CD2 compound interest monthly, and offers a nominal rate of 9.875% of you invests $10,000 today, which investment is the better offer, and how much additional interest will it earn over the next year?
a. CD1,12.50
b. CD1-13.69
c. CD2-24.67
d. CD2-33.44

8. You have loaned $2,000 to a friend for five years. At the end of that time, in return, he will pay back the $2,000, plus interest compounded at the rate of 10% per year. How much interest will you receive from your friend?
a. 1,221.02
b. 1,000
c. 3,000
d. 200

9. You plan to retire in 30 years and want to start saving right now. If you want $500,000 in the bank when you retire, what would you have to deposit right now in an investment account that compound a nominal annual rate of 10% on a quarterly basis?
a. 25,828.91
b. 26,767.76
c. 113,641.79
d. 28,654.28

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Quiz
1. A credit card account charges 20% as a nominal annual interest rate compounded monthly. What is the effective annual rate being charged on the unpaid purchase balance if the cardholder makes no payment?
a. 21.55%
b. 21.94%
c. 0.2002%
d. 18.37%

Answer: B

EAR = (1 + (0.20/12))12 - 1 = 21.94%

2. You invest $1,000 in a account that earns a nominal annual rate of 10%. How much additional interest would you receive if this account earned interest quarterly at 2.5%
a. 2.5
b. 3.81
c. 5.06
d. 5.17

Answer: B

FV = PV (1+i)n where PV is the present value
FV is the future value
i is the interest rate
n is the period

FV = 1,000(1 + 0.025)4
FV = 1,103.81

The amount with annual rate of 10% will generate the amount of

1,000 x (1.10) = 1,100

Additional amount = 1,103.81 - 1,100 = 3.81

3. Your firm must pay a debt obligation of $5,000 in two years. You want to invest $4,000 today to cover this obligation. Using annual compounding, what rate of ...

Solution Summary

This solution is comprised of a detailed explanation to provide how to calculate the nominal annual interest rate compounded monthly.

$2.19